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Planning for Required Minimum Distributions from IRAs: Why You Should Consider Making/Taking ROTH IRA Conversions in Low Income Years
Frank L. Washelesky

Individual Retirement Accounts (IRAs) often account for a large portion of an individual’s overall wealth as the person reaches retirement. With few exceptions, IRAs are taxable income at the time they are withdrawn.  In addition, a 10% penalty may apply if distributions are made prior to reaching age 59-½.

IRA owners must take required minimum distributions (RMDs) once they have reached age 70-½.  If RMDs are not taken timely, a 50% penalty may be incurred. Often, the RMDs can be quite large and the tax cost significant.

One thought to lower the tax cost of RMDs is to make a qualified charitable distribution (QCD). A QCD is a distribution from an IRA paid directly to a qualifying charity. A QCD is not included in the income of the IRA owner nor does the individual receive a separate charitable deduction.  In order to utilize this technique, an IRA owner must be over 70-½ and the total amount of the QCD in a given year must be capped at $100,000. The QCD will count against the RMD for the year.

For example, if an IRA owner is required to take an RMD of $50,000 in a given year, the individual could have the IRA distribute the entire amount directly to a qualified charity and report no taxable distribution from the IRA. Alternatively, the IRA owner could take the $50,000 distribution directly, report it as income and make a separate $50,000 donation to charity.  While this may have a similar tax impact, limitations on the deductibility of the charitable donation, state tax differences and other factors may make a direct donation from the IRA a more tax-efficient strategy.

Another way to reduce the tax costs of distributions from IRAs is to utilize ROTH IRA conversions for low-income tax years. In some situations, this may be easy. For example, an IRA owner with large tax loss carryovers may be able to realize large IRA income distributions without tax. Another time that this technique can be beneficial is in the years after retirement, but before reaching age 70-½, when RMDs begin. Since the taxpayer is no longer working and has not yet started taking distributions from the IRA, taxable income may be low.

Even in situations that are not as obvious, ROTH conversions may make sense as future tax rates are expected to be higher for a few reasons:

  • The current lower individual tax rates sunset at the beginning of 2026. At that time, the tax rates return to the higher rates in place prior to the Tax Cuts and Jobs Act of 2017. This may happen even faster if the Democrats take over the Presidency and Congress in 2020.
  • If an individual is currently married filing a joint tax return and one spouse dies, the person will be forced into the higher tax brackets for a single individual.
  • The political climate is such that the historically low tax rates are likely to increase even above the sunset rates.

The following table demonstrates that a large portion of taxable income in the 24% bracket for married persons in 2019 would be well into the 33% or 35% brackets if either of the above were to occur.

Converting a portion of an IRA to a ROTH IRA has the added benefit of reducing future RMDs as well because ROTH IRA amounts are not considered in determining the RMD amount going forward.

Proper planning for IRAs and IRA distributions has always been valuable. The current low tax rates make these decisions even more important, both to improve after-tax cash flow during retirement and to leave the largest legacy to your heirs.

For more information contact Frank L. Washelesky at [email protected] or 312.670.6235. Visit to learn more about our Wealth Management Services.

Please join us for an ORBA Wealth Management Group seminar covering this and related topics on December 11, 2019.  For more information or to register, visit

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