If you reach age 70-1/2 with money in a traditional IRA, you will be required to take a minimum taxable distribution from your IRA regardless of whether you need the money. Since this money has never been taxed, Uncle Sam will now want his share. While you cannot convert the required minimum distribution (RMD) itself directly into a Roth IRA once the distribution has happened, you can convert enough money from your traditional IRA into a Roth IRA to cover the minimum RMD amount before the required withdrawal is triggered. Money in a Roth IRA can be held or withdrawn tax free, but you will need to pay taxes on any money you convert from a traditional to a Roth in the year in which you convert it, and Roth IRAs must be held for at least five years to meet criteria for tax-free distributions. So, in effect, converting your RMDs into a Roth IRA is a way to set yourself up for tax-free withdrawals later in retirement.
Actually Taking a Distribution
Talk to your accountant and determine how much your RMD will be this year, or follow the IRS instructions for estimating it yourself (find a link in Resources.) Your RMD amount is determined by your account value and your life expectancy. A general rule of thumb is to expect an RMD to be about 10 percent of your traditional IRA's value. Discuss the tax consequences of your RMD on your overall tax situation.
Fill out the paperwork provided by your IRA trustee for an RMD. You must file this paperwork by April 1 in the calendar year after you turn age 70 1/2. So if your birthday is Sept.10, you will be 70-1/2 in March and must fill the paperwork out by the beginning of the next month. Request any taxes to be withheld if this was recommended by your accountant.
Send the paperwork to your Traditional IRA trustee and await your check.
Deposit your check into a personal account to cash the RMD amount. You will be adding this amount to your adjusted gross income. You are not allowed to deposit money into a Roth account from a traditional IRA trustee, which often issues a check payable as: "Brokerage Firm Trustee of Traditional IRA FBO John Smith." Once it is cashed in your personal account, you are able to deposit it into your Roth IRA. You are able to deposit up to $6,000 per year if you are still working and making at least this much. This method makes sense for smaller IRAs or for people who will be needing to use part of the distribution to pay the taxes owed on the RMD. For RMD amounts over $6,000 or for people who want all the money to go into a Roth, you will want to convert before the RMD is triggered.
Converting Prior to RMD Trigger
Confirm that you are going to have an RMD distribution required in this calendar year. Remember that RMDs must start when you reach 70-1/2. Talk to your accountant to determine the amount of your impending RMD and your likely tax consequence.
Take the amount of the expected RMD to your traditional IRA trustee. Confirm with them the amount you will be required based on current account values (there may be market fluctuations). Fill out the paperwork to do a partial conversion from your traditional IRA to a Roth IRA.
Enter the amount of your anticipated RMD as the amount to convert on the paperwork. You are not limited to the amount you can convert. Any amount you convert will be added to your taxable income for the year in which you convert it and, as long as you withdraw the money from your traditional IRA and pay taxes on it in the proper amount, the conversion amount will satisfy your requirement to make an RMD. Make sure you do the conversion well in advance of April 1 of the year following the day you turn 70-1/2.