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August 13, 2014 - Blog

RMDs to Fund Roth Conversions

More than Money with Gene Dickison Answers:

“My RMD will be about $10,000 this year.  I don’t need this money to pay bills.  What should I do with it?”

It depends . . .

. . . on your short and long term goals. 

One alternative for a taxpayer who wants to reduce their income tax bills in the future is to use their net (after-tax) RMD proceeds as the funds to pay the income tax bill on a Roth IRA conversion.

Using our question as an example – assuming a 15% tax bracket, this $10,000.00 RMD will net the taxpayer about $8,500.00.  The taxpayer wishes to convert a portion of their IRAs to a (non-taxable) Roth IRA and use their RMD to pay the tax.

A conversion of about $56,000.00 will result in a tax of about $8,500.00.  Using their RMD to pay this tax creates a new pool (inside a Roth IRA) that will likely escape income taxation for the life of the taxpayer – and maybe far beyond.

And if you like the result – you can do again next year.

Does this idea fit in your financial life?  Email


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