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Required minimum distributions (RMDs) from pre-tax retirement accounts can have a number of unintended consequences. These mandatory withdrawals can push you into a higher tax bracket, reduce your investment flexibility, increase your Medicare premiums and result in more of your Social Security benefits being taxed.
If you’re planning to convert IRA funds to a Roth account, consider talking it over with a financial advisor.
Converting a traditional IRA into a Roth account will mean you’ll avoid RMDs, but the costs are high. For example, moving $850,000 to a Roth IRA will trigger a massive income tax bill in the year in which you do the conversion. There are ways to optimize this process, but plenty of uncertainty still exists.
Tax rules require you to start withdrawing a certain amount from pre-tax accounts such as traditional IRAs and 401(k)s every year starting at a predetermined age. For someone who’s currently 65, RMDs will begin at age 73. This is not optional and stiff penalties apply if you don’t take RMDs exactly as specified.
Some people who already have enough income from other sources would rather not take RMDs, though. The taxes that RMDs trigger are one of the central reasons for this reluctance. The additional income from the RMDs can push you into a higher tax bracket and greatly increase your tax bill.
For example, a retired single filer with $60,000 in taxable income after deductions is in the 22% bracket in 2024 and would owe approximately $8,250 in federal income tax. But if they have to take a $50,000 RMD, their taxable income would nearly double, putting them in the 24% tax bracket. This could make their tax bill more than double to approximately $19,400.
These tax impacts aren’t the only issue. Having to withdraw funds on a schedule reduces your control over your hard-earned savings. The added income may also increase Medicare Part B premiums, and require paying taxes on a portion of Social Security benefits. RMDs even affect estate planning, because having to withdraw funds and pay taxes on them reduces the amount you will be able to leave heirs.
But you need some guidance planning or managing your RMDs, consider connecting with a financial advisor and talking it over.
With all this in mind, it may make sense to consider converting funds from your traditional IRA to a Roth account. This can work because Roths are exempt from RMD rules.
However, conversion is not always the best strategy. One reason is that you have to pay taxes now on any funds you shift to a Roth. If you converted a $850,000 balance into a Roth in 2024, it could cost you over $267,000 in taxes.
