How do RMDs affect Roth conversion?

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Required Minimum Distributions (RMDs) can impact Roth conversions significantly. According to Brad Barrett and other experts on the , here's how they affect the process:

  1. Timing Pre-RMDs: RMDs cannot be converted into a Roth IRA; they must be taken as taxable income. Thus, any IRA funds needed for Roth conversions must be handled before RMDs start. This is crucial for effective tax planning and legacy building, as Roth IRAs provide tax-free growth and withdrawals, beneficial for heirs 1.

  2. Delayed RMDs Advantage: The recent changes in the Secure Act 2.0 extend the age to start RMDs to 75 for those born in 1960 or later. This delay provides more time to perform Roth conversions, offering a broader window to spread out conversions and manage tax impacts more efficiently 2 3 4.

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    Fritz discusses his retirement bucket strategy, which involves building up cash and bonds to avoid selling equities during a downturn. He also talks about the importance of converting before-tax IRA and 401K money into a Roth before RMDs kick in.
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  3. Tax Planning Opportunity: Delaying RMDs allows for significant tax efficiency. During the gap years before RMDs, retirees showing low taxable income can perform Roth conversions at lower tax rates. By maximizing this period, individuals can reduce the balances in traditional IRAs, thereby lowering future RMDs and the associated tax burden 2 3.

By considering these strategies, retirees can leverage the extended timeline to perform Roth conversions, effectively reducing their taxable income and enhancing their overall retirement strategy.

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