New Rule: All IRA RMDs Must Be Satisfied Prior to Doing a Roth Conversion
What Changed in 2024 for Roth Conversions?
A new rule confirmed by the IRS in the final SECURE Act 2.0 regulations released in July 2024 requires individuals to take all required minimum distributions (RMDs) from their traditional IRAs before completing a Roth IRA conversion. This change applies to taxpayers who are subject to RMDs and want to convert pre-tax IRA funds to a Roth IRA in the same calendar year.
This update impacts millions of retirement savers. If you own multiple IRAs, the IRS now mandates that the full amount of your aggregated RMD must be distributed before any amount can be converted to a Roth IRA or rolled over.
Important note: This rule does not apply to required distributions from employer-sponsored retirement plans like 401(k)s.
Why the New Rule Matters
In previous years, many account holders believed they only needed to take the RMD for the specific account being converted. That approach is now invalid. Under the current rule, the IRS requires you to distribute your full combined RMD—regardless of which IRA it comes from—before any Roth conversion can be initiated.
Failure to follow this rule can lead to costly consequences. Any portion of an RMD that is mistakenly included in a Roth conversion will be treated as an excess contribution and subject to correction, taxes, and possible penalties.
Understanding the Aggregation Rule for IRA RMDs
RMDs must be calculated separately for each traditional IRA. However, the IRS allows the total required distribution to be taken from one or more of your IRAs. This is called the aggregation rule.
But here's the key detail: The first dollars withdrawn from your IRA in a given year are considered to be RMDs. These dollars cannot be converted to a Roth IRA or rolled over.
So, the sequence of actions is crucial:
- Calculate your total RMD across all traditional IRAs.
- Withdraw the full RMD amount.
- Only then, proceed with a Roth conversion.
Example: Arnold's IRA Scenario
Let’s consider a practical example to illustrate the rule in action:
Arnold is 80 years old. His Uniform Lifetime Table factor is 20.2 for 2024. He has three separate IRAs:
- IRA #1: $100,000 balance → RMD = $4,951
- IRA #2: $300,000 balance → RMD = $14,85
- IRA #3: $450,000 balance → RMD = $22,278
Total Aggregated RMD = $42,081
Arnold can take this amount from one IRA or distribute it across multiple accounts. However, he must withdraw the entire $42,081 before any Roth IRA conversion takes place.
Suppose Arnold only takes $4,951 from IRA #1 and then tries to convert $50,000 from that same IRA to a Roth IRA. Because he did not take the full RMD, the IRS will treat $37,130 of the Roth conversion ($42,081 – $4,951) as an excess contribution.
He would then be required to correct the excess and potentially face penalties.
Planning Strategies to Avoid Penalties
You can avoid IRS penalties and complications by following these steps each year:
Step 1: Calculate RMDs Early
Use IRS tables to calculate the required RMD for each IRA. Sum them up to get your total aggregated RMD.
Step 2: Withdraw RMDs Before Any Conversion
Make sure your total RMD has been distributed in full before processing a Roth conversion. Verify that the funds you want to convert are not part of the RMD.
Step 3: Document Everything
Keep clear records of your RMD withdrawals and Roth conversion transactions. This makes IRS reporting easier and ensures you remain compliant.
Key Takeaways
- You must withdraw your total aggregated IRA RMD before any Roth IRA conversion.
- Partial RMD withdrawals do not qualify you to convert the rest of the account.
- Roth conversions that occur before completing the full RMD will result in excess contributions.
- Work with your advisor or tax professional to calculate and time withdrawals accurately.
FAQs: Roth IRA Conversions and IRA RMD Rules (2024)
Do I need to take RMDs from my 401(k) before converting an IRA to a Roth?
No. RMDs from employer-sponsored plans like 401(k)s are not counted toward IRA aggregation rules for Roth conversions.
Can I take my full RMD from just one of my IRAs?
Yes. You may withdraw your total aggregated RMD from a single IRA or split it among multiple accounts.
What happens if I convert before completing my full RMD?
Any remaining RMD amount will be treated as an excess Roth contribution. You’ll need to correct it and may face penalties.
Can I convert RMD funds into a Roth IRA?
No. RMD funds are not eligible for rollover or Roth conversion.
When should I take my RMD if I plan to convert later in the year?
Take your full RMD early in the year before initiating any Roth conversion to avoid rule violations.
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Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.