Can a Required Minimum Distribution Be Used to Contribute to a Roth IRA?

by Nola Moore

When you reach age 70 1/2, you must start taking withdrawals from your individual retirement accounts, whether you need the money or not. If you don't need the money, it makes sense to sock it away someplace smart -- and a Roth IRA's tax benefits may have some appeal. While you cannot directly transfer your required minimum distribution into your Roth account, there is nothing preventing you from making a Roth contribution if you meet IRS requirements.

Compensation Requirement

The first consideration for any potential Roth IRA contribution is compensation, and that's especially important for those taking required minimum distributions. Your traditional IRA distribution does not count as part of your compensation for the year, that's only wages, tips, salaries, commissions and the like -- money earned directly from working. You must have compensation equal to or greater than the value of your contribution for the contribution to be legal. It is possible, however, that the required minimum distribution allows certain people enough financial flexibility to make Roth contributions -- if your distribution means that you don't need $5,000 worth of compensation, you can of course deposit that to a Roth IRA.

Other Requirements

There is no age limit on Roth IRA contributions, so you can contribute to a Roth at any time. You must fit below the maximum adjusted gross income limit --$120,000 for single filers in 2011, and you cannot contribute more than the allowable annual contribution, currently $5,000 for those under age 50, $6,000 for those older.

Tax Considerations

Unlike a traditional IRA, Roth IRA contributions are not tax deductible, so if you are looking for a way to offset the additional tax income that results from an required minimum distribution, this is not it. A Roth contribution still has tax benefits, however. As long as you follow the IRS withdrawal rules for Roth IRAs, all earnings in that account will be tax free. Of special interest to older people is the Roth IRA five-year rule: No matter how old you are, your Roth account must be at least five years old to avoid penalties and taxes on withdrawals. The five-year accounting starts with the first Roth contribution you make, whenever that happens to be.

Inherited Accounts

If you have an inherited traditional IRA, it is worth noting that the IRS does not view those required minimum distributions as yours -- that is, they are not equivalent to you taking a withdrawal from your own account and do not preclude you making traditional IRA contributions into your own account and deducting that income from your taxes. See IRS Publication 590 for complete details on all IRA contribution rules.

About the Author

Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.

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