Dear Liz: I’m supposed to start required minimum distributions soon. Can I deposit my annual distribution into a Roth IRA? I understand that I have to pay taxes on the RMD, but if I can put it in a Roth, I would guess I don’t have to pay future capital gains taxes. I am retired and not working, so I wasn’t sure whether I can contribute to a Roth IRA.
Answer: You can’t. Contributions to IRAs, including traditional and Roth versions, require you to have earned income at least equal to the amount you’re contributing. Contributions are also limited to a certain dollar amount. In 2026, the limit is $7,500, plus $1,100 for people 50 and older.
There may be another way to get the tax-free growth you want. You can convert traditional retirement funds to a Roth IRA without earned income. Qualified Roth withdrawals are tax-free, and there are no RMDs during the original owner’s lifetime.
But late-in-life conversions can be tricky. Not only are conversions typically taxable, but they can temporarily raise Medicare premiums, subject more of your Social Security benefits to tax and push you into a higher bracket. You should consult a tax pro before converting.
Keep in mind that you can’t convert the RMD itself. You must take your required distribution for the year before converting additional money.
Dear Liz: Why do you seem to discourage older people living in homes that have appreciated over the years from selling because of the tax consequence? Recently, someone complained they could not move out of their family home because they would owe $400,000 in taxes. Why don’t you show the math: If they owe $400,000, even at the maximum (20% capital gains), that means they received $2,000,000. So even after taxes, they net $1,600,000. People who are asking the question you answered today need to either recognize they are swimming in money after taxes, or that they incorrectly think their net profit is taxed 100%.
Answer: If you’re referring to the couple who wanted to use their home sale proceeds to give down payments to their children, your math is a bit wonky.
The couple said selling their paid-off home would generate more than $1 million in proceeds. Proceeds aren’t the same as taxable gains, and the tax bill depends on the home’s original cost, qualifying improvements, selling expenses and the $500,000 home-sale exclusion for eligible married couples.
Taxable home sale gains can have the same impact as Roth conversions, in that they can raise Medicare premiums, make more Social Security benefits taxable and push other income into higher tax brackets. Some taxpayers also face the 3.8% net investment income tax.
Furthermore, the couple weren’t complaining that they couldn’t sell their home — they wanted to. My response was to remind them that their generosity could have big financial consequences.
Your ultimate point is a good one, though. Taxes matter, but they should never be the only consideration in a major financial decision.
Dear Liz: I know from personal experience after selling a longtime residence that tax return information is shared with the Social Security Administration. If the two-year look-back shows high enough modified adjusted gross income, Medicare premiums can increase significantly. There are appeal options, but a one-time home sale doesn’t necessarily qualify.
Should the couple consider a home equity line of credit to generate funds without triggering taxes?
Answer: That’s one option a financial planner might suggest, although HELOCs typically have variable interest rates and require monthly payments, which can burden retirees.
Another possibility is a reverse mortgage, which generally costs more but doesn’t require monthly loan payments. Interest and fees increase the loan balance, reducing equity available for future needs. Borrowers must continue paying property taxes, insurance and maintenance, and the loan generally comes due when they sell or permanently leave the home.
But again, taxes are just one factor. The planner can help them sort through all their options to find one that best fits their goals and needs.
Got a question about money? You can submit ithere.
Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
The post Can you convert an RMD to a Roth IRA? appeared first on Los Angeles Times.
