This is a slightly different perspective on Roth conversions than the one we just discussed. In a way, you are reinvesting your RMD in a lower tax bill. While it may seem odd to purposefully drive up your tax bill now, it may help you lower it later. If you have to take an RMD that you don’t need, consider converting more of the account to a Roth IRA and using that RMD to pay the tax bill. The limiting factor for a lot of people though, is having the money outside of a retirement account to pay the taxes on the Roth conversion. Use it to Pay Taxes on Roth ConversionsĪs long as you take your RMD for the year, you can convert any remaining amount in a tax-deferred retirement plan to a Roth IRA. However, the IRS specifically prohibits this.
And Roth IRAs are funded with after-tax money. That is the point of RMDs after all, to force you to withdraw that money so it can be taxed. It may seem logical that you would be able to invest it in a Roth IRA since you have already paid taxes on it. If you have to take an RMD, you cannot reinvest that RMD into an IRA of any type, including a Roth. Tax-free municipal bonds may be a good option too if you are in a high tax bracket. If you haven’t invested in a taxable account before make sure you take some time to understand how investment taxes work. Passive investing using index funds or ETFs, taking advantage of tax-loss harvesting ( and tax-gain harvesting when the time is right), and avoiding investments that produce taxable income like interest or ordinary dividends can help you keep your investment taxes low. You’ll want to plan for capital gains, as well as any dividends or interest payments you receive from the investments you hold in the account. The new issue you now have is tax management of that account. Although you won’t get the tax shield that an IRA provides, you can still continue to earn a return. The simplest option you have for reinvesting your unneeded required minimum distribution is to deposit it into a taxable brokerage account.
That doesn’t mean that you can’t save that money, or reinvest it at all.įortunately, there are some things you can do to minimize their negative impact on your savings. They can even disrupt your withdrawal plan if you don’t account for them properly. Required minimum distributions are one of the most loathed aspects of retirement plans. If you are wondering whether you can reinvest your required minimum distribution, then chances are you have one coming up that you realize you don’t need.
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