Ok, so at 70.5 (or into the year after) years of age, I'll start RMDs. Still 9 years away....
But the same amount that I am required to take as a distribution could be put into my WIFE'S IRA, no? (19 years between us. She's the younger.) I could take X amount from my own, and turn around and get the tax-sheltered benefit of simply dropping that sum into HER (Trad.) IRA...
What's wrong with this plan? There's gotta be a Catch, eh? It's too damn simple and direct!
Comments
If it was that simple.
1. RMD - you have to take this; that's the end of the story as far as this money goes.
2. IRA contribution - you need "compensation" (slightly different from earned income, see below) in order to fund an IRA. The RMD doesn't count as compensation.
3. If you or your wife has compensation (not RMD), then you can fund a Roth for either or both of you (but not more than your combined compensation) since there's no age limit on Roths. You could also fund your wife's traditional IRA.
For completeness - compensation generally includes taxable W2 or self-employed income, non-taxable combat pay, and alimony. Earned income (a term generally used in conjunction with the earned income credit) does not include alimony. Neither includes IRA distributions.
'Course if you're receiving alimony, you won't be able to contribute to your then ex-wife's IRA
(Well, cash is cash, and if you have $1000 in compensation, and a $1000 RMD, you can put $1000 in the IRA and think to yourself that the cash came from the RMD. That's okay, but the IRS still says the contribution is from your compensation.)
That said, the usual rules apply. If you contribute to a traditional IRA and the contribution is deductible, then you're not paying taxes on the money when you contribute it. Technically, you're not paying taxes on that $1000 of compensation, but if you choose to think of the contribution as coming from the RMD, you're not paying taxes on the RMD.
So no matter how you view it, you're only paying taxes when you withdraw, not when you contribute, to the deductible, traditional IRA. No double taxation.
Now if he uses the RMD to fund a Roth, then that would be a winner.
(If you don't have that compensation, you're not allowed to contribute to the IRA.)
There's no double taxation, because you get to take a $1000 deduction when you make the contribution.
I've said nothing about where you got the cash from that you used to make the contribution. I could have gifted it to you. Or you might have had $1000 in investment income. Or you could have taken out of an IRA as an RMD. Doesn't matter - cash is cash.
That's why I said to forget about the RMD, it's a red herring. The only part it plays is as a place to get cash from. It's no different from investment interest. You can't roll it over, you can't convert it to a Roth. Same as with investment income.
msf, has provided; as usual, (a hugh thank you that you are part of this forum) a basis of information for this topic.
A real world note about this. After the market melt, the husband was downsized out of his employment in June of 2009. Her employment continued to provide enough net income for their lifestyle (frugal). She continued to fund her 401k to the maximum for that tax year, as well as both fully funding Roth IRA's to the maximum. They file a joint income tax return, obviously being viewed for purposes of total household income via the IRS.
In addition to her 401k, they continued to fund both Roth IRA's via her income. His Roth having a "street name" of a spousal Roth. If you search terms for spousal Roth IRA, you'll find proper documentation, and I would think that TR Price's web site is complete with this info, too.
So, yes; you'll take your RMD, pay taxes at the ordinary tax rate and then you may do as you choose with the money. As msf noted, as long as there is enough "real income" from your wife's employment, you both may contribution to a Roth within the limit of that earned income or the max of a Roth contribution for each.
So i guess i missed the point of this conversation, other than crash robbed the cradle?
You may already be taking your "RMD" as a result of taking qualified distributions from your IRA which you may have started as early as 59.5. RMD means that you "must take at least a minimum qualified distribution starting at age 70.5".
Helping to contribute to your wife's Roth IRA and her spouse's Roth IRA (you) would not trigger any taxes going forward, while the IRA would.
By the way, you could start doing this after you reach 59.5, you don't have to wait to consider helping fund your wife's IRA (or Roth IRA) until you reach 70.5.
Most people don't like bottom-grubbing (buying at market depths). But if you have an appetite for that, beaten-up growth segments (ie: stocks, EM bonds, real estate, etc.)** make nice targets for Roth conversions - even for fairly old investors. That's because the potential "bounce" in NAV constitutes, essentially, tax-free capital appreciation. There is a 5-year waiting period on taking out the appreciated gains. To the best of my (admittedly limited) understanding, that time-limit does not apply to withdrawing the original investment - though other restrictions may apply.
Crash - you might be overly concerned about RMD. The amounts (when I ran the numbers in our case) didn't seem that great - close to what we normally pull out to supplement living expenses. That said, with about 50% now in Roths (from two conversions) I'm a lot more comfortable about the flexibility I have for taking future distributions. Additionally, even though a RMD is required/taken, you are still free to reinvest the sum in a non-sheltered account. (You don't need to spend it if you don't want to.)
According to the linked article, "There is no age limit on when a Roth conversion can occur..." I'm a bit surprised at that myself. http://punchinvest.com/roth-ira-conversion-considerations/
** To clarify: The market sectors mentioned above were solely to illustrate what I meant by "growth segments" - and not intended to suggest currently attractive valuations.