10 Things You Must Know About Roth IRAs and RMDs

If you are retired or approaching retirement, there is a good chance you have spent years hearing about Roth IRAs, traditional IRAs, and something called a required minimum distribution, or RMD.

The first two sound relatively friendly. The third sounds like something invented by a government bureaucrat who had a particular fondness for acronyms.

The good news is that RMDs (Required Minimum Distributions) are easier to understand once you know how they work. Even better, Roth IRAs have some important advantages that can make retirement planning more flexible, particularly as you get older.

I think one of the biggest mistakes retirees make is treating every retirement account as if it works the same way. It doesn’t. The tax treatment, withdrawal rules, RMD requirements, and estate-planning consequences can be very different.

Before getting into the ten things I think every retiree should know, here’s a simple way to see the basic differences.

Roth IRA vs. Traditional IRA vs. RMDs

The important point is that neither account is automatically “better.” They serve different purposes.

A traditional IRA can be extremely valuable because you can potentially deduct contributions and allow investments to grow tax-deferred. A Roth IRA can be valuable because you pay the tax upfront and potentially receive tax-free qualified withdrawals later.

For many retirees, owning both types of accounts creates more flexibility than relying entirely on one.

1. Roth IRAs Do Not Have RMDs While You Are Alive

This is probably the most important Roth IRA rule to understand.

If you own a Roth IRA, you do not have to begin taking required minimum distributions at age 73. In fact, under current law, you do not have to take RMDs from your Roth IRA at all during your lifetime.

That makes the Roth IRA fundamentally different from a traditional IRA.

Traditional IRA owners generally must begin taking RMDs at age 73 under current rules. The RMD is based on the account balance at the end of the previous year and an applicable life-expectancy factor.

Your Roth IRA can simply remain invested. If you don’t need the money, you don’t have to withdraw it. You can leave the account alone and potentially allow it to continue growing.

That flexibility becomes increasingly valuable later in life. You may have Social Security, a pension, rental income, taxable investments, and other resources covering your expenses. If you don’t need additional money from your Roth, there is no tax law forcing you to take it out simply because you reached a certain birthday.

I think of the Roth IRA as a retirement account where you get to decide when you open the exit door.

2. Traditional IRA RMDs and Roth IRA Withdrawals Are Taxed Differently

The reason RMDs matter so much is taxes, which is the main reason most retirees look into Roth IRAs.

When you take an RMD from a traditional IRA, the distribution generally becomes taxable income, except for amounts that qualify for special treatment, such as previously taxed basis.

A Roth IRA works differently. Qualified Roth IRA distributions are generally tax-free.

That distinction can become extremely important in retirement.

Imagine you need $30,000 to supplement your Social Security income. You could take the money from a traditional IRA and potentially increase your taxable income. Alternatively, if you have sufficient funds in a Roth IRA and meet the requirements for a qualified distribution, you can potentially take the money without adding that distribution to your taxable income.

That gives you another lever to pull when managing your annual tax bill.

I like to think about retirement income as a collection of buckets. You have taxable money, tax-deferred money, and tax-free money. The more control you have over which bucket you use each year, the more flexibility you have.

3. Your First RMD Can Create a Tax Trap

There is an odd wrinkle in the RMD rules that catches people by surprise.

Your first RMD is generally for the year you reach age 73, but you can generally delay that first distribution until April 1 of the following year.

At first glance, delaying sounds attractive. There is a catch.

If you delay your first RMD until April 1 of the following year, you will generally have to take your second RMD by December 31 of that same year.

That means you could have two RMDs hitting your taxable income in one calendar year. This means more taxes in many cases.

For example, suppose you turn 73 in 2027. You could wait until April 1, 2028, to take your 2027 RMD. You would then still have to take your 2028 RMD by December 31, 2028.

Now you have two taxable distributions in one year. That might be perfectly reasonable in your situation, but it could also push more of your income into a higher tax bracket or affect other income-related costs.

I would never automatically delay the first RMD simply because the IRS gives you permission to do so. I would look at the tax consequences first.

Sometimes taking the first RMD during the year you turn 73 produces a cleaner tax result.

4. Roth Conversions Can Reduce Future RMDs

This is where Roth IRAs become particularly interesting for retirement planning.

A Roth conversion allows you to move money from a traditional IRA into a Roth IRA. The amount converted is generally included in your taxable income for the year of the conversion, assuming it is otherwise taxable.

You pay the tax today in exchange for moving the money into an account that does not have lifetime RMDs.

That can create a valuable long-term tradeoff.

Suppose you have a $500,000 traditional IRA and expect the account to continue growing. Eventually, your RMDs could become substantial. If you gradually convert portions of the traditional IRA to a Roth IRA before RMDs become mandatory, you can potentially reduce the size of your traditional IRA and therefore reduce future RMDs.

The strategy is not automatically beneficial. You have to consider your current tax bracket, future tax rates, Medicare premiums, other income, charitable giving, and how much cash you have available to pay the conversion tax.

A Roth conversion is therefore less about “avoiding taxes” and more about deciding when and how you want to pay them. More choices, always a good thing!

A Roth Conversion Example: The Years Before RMDs Matter

Here’s a simplified example of why the years before RMDs begin can be so important.

Imagine a 68-year-old retiree with $500,000 in a traditional IRA. The retiree also has Social Security and enough other income to cover normal living expenses. The traditional IRA is invested for long-term growth, and the retiree does not expect to need most of the money immediately.

Rather than waiting until RMDs arrive, the retiree could examine whether converting a portion of the traditional IRA to a Roth IRA each year makes sense.

Suppose the retiree converts $20,000.

That $20,000 generally becomes taxable income for the year of the conversion. The retiree would therefore want to determine how much room remains in the desired federal tax bracket before deciding whether $20,000 is appropriate.

The next year, the retiree could repeat the analysis.

Maybe another $20,000 makes sense, maybe $10,000 does. Or maybe $30,000 does. There is no magic conversion amount that works for everyone.

The important part is the process.

Instead of waiting for the government to tell you how much money you must withdraw, you are voluntarily moving some money from the tax-deferred bucket into the tax-free bucket while you still have control over the timing.

Over several years, those conversions could reduce the balance subject to future RMDs.

There is another potential benefit. If the Roth investments grow after the conversion, that future growth generally occurs inside the Roth IRA without creating lifetime RMDs for the original owner.

That doesn’t mean every retiree should convert as much as possible.

Paying tax unnecessarily today can be just as inefficient as paying too much tax later. The goal is to find a reasonable balance between the two.

5. Roth Conversions and RMDs Are Not the Same Thing

This distinction causes plenty of confusion.

Once you reach your RMD age, you generally cannot simply convert your required distribution directly into a Roth IRA and call it a Roth conversion.

Your RMD generally has to come out first. An RMD itself is not eligible for rollover treatment.

After satisfying the RMD, you may be able to convert additional traditional IRA money to a Roth IRA, assuming the transaction makes sense for your situation.

That means your strategy can change once RMDs begin.

Before RMDs, you might have more flexibility to choose how much to convert. After RMDs begin, you have to account for the required distribution before considering an additional conversion.

This is one reason I think Roth conversion planning should begin several years before RMD age rather than becoming a last-minute project.

Retirement planning works better when you make decisions before the tax bill arrives.

6. RMDs Can Affect More Than Your Income Tax

This is an area I think retirees sometimes overlook, an RMD does not exist in isolation.

A larger taxable distribution can increase your modified adjusted gross income. That number can affect other parts of your financial life, including Medicare income-related premium adjustments.

In other words, taking an extra $20,000 from a traditional IRA can potentially have consequences beyond the federal income tax on that $20,000.

That’s why I don’t recommend looking at an RMD simply as money you are required to withdraw.

I would look at the entire tax picture.

How much Social Security are you receiving? Do you have pension income? Are you selling investments? Maybe planning a Roth conversion? Are you realizing capital gains? Are you approaching a Medicare income threshold?

Those questions can matter more than the RMD by itself.

The goal isn’t necessarily to minimize your RMD. The goal is to manage your total retirement tax picture over many years.

7. The RMD Rules Apply Differently to Different Retirement Accounts

Another common misconception is that you can treat all retirement accounts as one giant IRA.

The IRS doesn’t see them that way. Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and other retirement plans can have different RMD rules.

For example, traditional IRA owners generally calculate the RMD for each IRA separately, although the total IRA RMD can generally be withdrawn from one or more of their IRAs. Employer plans such as 401(k)s generally have different aggregation rules.

Designated Roth accounts inside employer plans also changed under SECURE 2.0. Beginning in 2024, designated Roth accounts in plans such as 401(k)s are no longer subject to lifetime RMDs while the owner is alive.

This is one reason I encourage retirees to inventory every retirement account they own. Don’t just write down “retirement money.”

Write down the account type, balance, tax status, beneficiary, and RMD status.

It becomes much easier to make intelligent decisions when you know exactly what you own.

8. Roth IRAs Can Be Powerful Estate-Planning Tools

The Roth IRA advantage doesn’t necessarily end when you die.

Your beneficiaries generally will have distribution requirements after inheriting a Roth IRA. However, qualifying Roth IRA distributions are generally tax-free, which can make an inherited Roth account attractive compared with an inherited traditional IRA.

The SECURE Act also changed the rules for many non-spouse beneficiaries of retirement accounts.

In many cases, a beneficiary who inherits an IRA after the owner’s death must empty the account within ten years. There are important exceptions for certain eligible designated beneficiaries, including surviving spouses, certain minor children, disabled or chronically ill individuals, and beneficiaries who are not more than ten years younger than the original owner.

That makes beneficiary planning important.

A Roth IRA can potentially give heirs access to money without the same income-tax burden associated with distributions from a traditional IRA.

Of course, estate planning is highly individual. Beneficiary designations, trusts, spouses, children, tax laws, and state laws can all change the answer.

Still, I think retirees should view the Roth IRA as more than a personal retirement account. It can also become part of the legacy they leave behind.

9. The Five-Year Roth Rules Still Matter

Here’s another area where the Roth IRA can get confusing.

There are five-year rules associated with Roth IRAs, and they don’t all mean exactly the same thing.

Generally, for a Roth IRA to have tax-free qualified distributions of earnings, you must satisfy the five-year aging requirement and one of the qualifying conditions, such as reaching age 59½, becoming disabled, using the distribution for a qualifying first-home purchase subject to the applicable limit, or the owner’s death.

Roth conversions can have their own five-year considerations as well.

This matters if you are thinking about converting money shortly before you need it.

A Roth conversion isn’t simply a magic button labeled “tax-free money.” The tax treatment of contributions, conversions, and investment earnings can differ depending on when the money entered the Roth and when you withdraw it.

I would keep careful records of Roth contributions and conversions. Your brokerage may provide useful tax documents, but ultimately you are responsible for understanding your tax history.

Good records can save a lot of headaches later.

10. You Don’t Have to Spend an RMD

This might be my favorite RMD fact because it changes how you should think about the entire subject.

An RMD is a required distribution, not a required spending spree.

You may have to take the money out of your traditional IRA, but that doesn’t mean you have to spend it.

If you don’t need the money for living expenses, you might invest it in a taxable account, use it for a major purchase, give it to family, donate it to charity, or use it for another legitimate financial purpose.

Some retirees make the mistake of thinking, “The IRS made me take this money, so I guess I have to spend it.” No, not even close!

The IRS requires the distribution of these funds. It doesn’t require you to blow it at the casino or buy a 47-foot recreational vehicle.

You get to decide what happens after the money leaves the IRA.

For charitable retirees, qualified charitable distributions can also be an important part of an RMD strategy. A QCD can allow an eligible IRA owner to make a qualifying charitable gift directly from an IRA, subject to the applicable rules and limits.

That can be particularly useful for someone who wants to give to charity while also managing taxable income.

Roth IRAs and RMDs Are Really About Control

When I look at Roth IRAs and RMDs, I don’t see two separate retirement-planning topics. I see a question about control.

Traditional IRAs give you valuable tax benefits while you are working and saving, but eventually the government requires distributions. Roth IRAs require you to give up the immediate tax deduction associated with traditional IRA contributions or pay taxes when you convert money, but they give you considerable flexibility later.

That flexibility can become increasingly valuable as you age.

You may want to control your taxable income, and manage Medicare premiums. Also, you may want to leave money to your children. You may want to avoid selling investments during a bad market, and simply want to have money available that doesn’t create another taxable-income event.

A well-designed retirement plan can give you choices.

That’s really what I want from my retirement money. I don’t want every financial decision dictated by a calendar, an account statement, or an IRS deadline.

I want enough flexibility to decide when to take money, where to take it from, how much tax to pay, and what I want that money to accomplish.

The Roth IRA can be an important part of creating that flexibility.

The biggest lesson I take from all of this is simple. Don’t wait until your first RMD arrives to start thinking about RMDs. By then, some of your best planning opportunities may already be behind you.

If you are several years away from RMD age, that can be a particularly valuable planning window. You can look at Roth conversions, tax brackets, charitable giving, investment withdrawals, Social Security, Medicare, and your future spending needs as one connected retirement strategy.

Retirement gives you more freedom when your money gives you more choices.

And when it comes to retirement, having choices is something I would much rather have than another acronym.

Note: This article is for educational purposes and is not individualized tax or financial advice. Tax rules can change, and your results depend on your income, filing status, account types, age, beneficiaries, and other circumstances. Consider consulting a qualified tax or financial professional before making a Roth conversion or other major retirement-account decision.