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If someone is at the stage of life where due to their age and financial situation they
do not pay any income tax, does it make sense that they should increase the amount of
the RMD that they have to take out of their IRA to thus reduce the tax consequences that
their heirs will have to eventually deal with.

In the particular case I'm referring to, the RMD currently being withdrawn could be almost
doubled without paying any additional taxes. Seems to me that it would be a no-brainer to
do that.

Am I missing something?
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Am I missing something?

Off the top of my head - lawsuit protection.

IRAs, and it varies from state to state, have some levels of protection from lawsuits/liens.

Another, if you withdraw too much, do you start crossing certain limits on Medicare where premiums go up.

JLC
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In the particular case I'm referring to, the RMD currently being withdrawn could be almost
doubled without paying any additional taxes. Seems to me that it would be a no-brainer to
do that.

Am I missing something?

-----------------------------
As JLC mentioned, liability protection. Also, if you have properly made beneficiary designations, the IRA account will not be subject to probate, if that's a consideration.

Don't worry too much about the effect on your heirs, especially in advance. Inheriting an IRA account is not a very painful problem - even with the new rules with a 10-year mandated payout.

Bill
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In the particular case I'm referring to, the RMD currently being withdrawn could be almost doubled without paying any additional taxes. Seems to me that it would be a no-brainer to do that.

Am I missing something?


Assuming outliving the money is not an issue here...

George
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Assuming outliving the money is not an issue here...

He didn't say withdraw more than the RMD and then spend it.

PSU
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No, outliving the money is not an issue.

In fact, whatever amount that is withdrawn will not be spent - at least not now. It will simply be moved to a taxable savings/investment account.
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In the particular case I'm referring to, the RMD currently being withdrawn could be almost
doubled without paying any additional taxes. Seems to me that it would be a no-brainer to
do that.

Am I missing something?


Instead of simply moving the funds to a regular brokerage and paying the tax, why not do a Roth Conversion? Pay the tax and put it in an account where it can accrue tax free.

IP
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Hadn't thought about moving it over to a Roth account.

Is that as simple as just transferring the money over to the Roth or is there more "stuff" involved?
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If someone is at the stage of life where due to their age and financial situation they
do not pay any income tax, does it make sense that they should increase the amount of
the RMD that they have to take out of their IRA to thus reduce the tax consequences that
their heirs will have to eventually deal with.


The RMD is the RMD (Required Minimum Distribution). It is a fixed amount determined by the value of the account on Dec 31 of the year before the distribution, and the age of the IRA owner (and possibly the age of their spouse, if their spouse is more than 10 years younger). Since it is a fixed amount, there is no 'increasing' the amount of the RMD. What can be increase is the amount that is distributed from the IRA. At that point, the owner is no longer taking the RMD, but, rather, is taking withdrawals that are in excess of the RMD.

If the IRA is an IRA that the owner can roll to a Roth IRA, then if the owner truly wants to reduce the tax burden on their heirs, the best thing to do would be to roll any distributions in excess of the RMD to a Roth IRA. That way, the beneficiaries will get money with no tax burden at all. With the new SECURE Act, the beneficiary will have 10 years to completely distribute the inherited Roth IRA. But in the mean time, the money will be able to remain invested, with no accumulating tax burden.

Please note - the RMD amount itself cannot be converted to a Roth IRA. Only withdrawals in excess of the RMD are allowed to be converted to a Roth IRA. So, if the owner isn't spending even the RMD amount, and wants to pass it on to heirs, the RMD amount should be invested in a taxable account.

In the particular case I'm referring to, the RMD currently being withdrawn could be almost
doubled without paying any additional taxes. Seems to me that it would be a no-brainer to
do that.

Am I missing something?


The protections from creditors that are missing from taxable accounts, and that were mentioned by others, would still be in place if the excess withdrawal was converted to a Roth IRA.

AJ
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Don't worry too much about the effect on your heirs, especially in advance. Inheriting an IRA account is not a very painful problem - even with the new rules with a 10-year mandated payout.

Well, it depends on how big a Traditional IRA is. If the IRA is $1MM, even if there's no growth during that 10 years, it would still average $100k/year, which would bump a lot of people up to a higher tax bracket. Any growth would increase the average over $100k/year.

That said, the beneficiaries will still be ahead, even after paying the income taxes, no matter what tax bracket they are bumped into. But if the OP is in a situation now where the money can be withdrawn while paying little/no tax, and converted to a Roth IRA, which will have no tax impact on the beneficiaries, why wouldn't the OP want to do that?

AJ
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Is that as simple as just transferring the money over to the Roth or is there more "stuff" involved?

Once you have a Roth IRA open, it's pretty much that simple. If you don't want to sell your investments, move cash and then re-buy the same securities in your new account, you can even do 'in-kind' conversions, where you tell the brokerage "Move xx shares of ABC into my Roth IRA as a conversion". It took me about 3 minutes online to do a conversion from my Traditional IRA to my Roth IRA (both at Vanguard). I didn't have to talk to anyone about doing the conversion.

I will say - it's probably easier to do if both accounts are at the same brokerage. I haven't ever done a conversion between accounts at different brokerages.

AJ
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aj485:

So, for example, if the RMD is $10,000 and the actual withdrawal is $15,000 then only $5000 could be moved over to the Roth - correct?

And, yes, all of the accounts at the same brokerage. So transferring should be simple.
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So, for example, if the RMD is $10,000 and the actual withdrawal is $15,000 then only $5000 could be moved over to the Roth - correct?

Correct. The $10,000 would have to go into a taxable account, and the $5,000 could go into the taxable brokerage account, too, or you could convert it into a Roth IRA. The tax impacts are the same either way, since $15,000 was taken out of the Traditional IRA. So if you don't need the money for spending, and it's not going to cost you any additional taxes, you may as well convert the extra $5,000 into a Roth IRA to minimize tax impacts for your heirs.

AJ
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AJ,
I thought you could only put work generated income into a Roth IRA.
Can I put money from a pension check, or SSI check, or withdrawal from my 457b differed comp account? I won't have RMD until 2022 I believe (then only amount over RMD can be placed in a ROTH IRA).
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I thought you could only put work generated income into a Roth IRA.
Can I put money from a pension check, or SSI check, or withdrawal from my 457b differed comp account? I won't have RMD until 2022 I believe (then only amount over RMD can be placed in a ROTH IRA).


You are not putting new money into an IRA. You are correct that earned income is used to put new money into an IRA. Conversions take the money you already put into a Traditional IRA and with tax payment it converts to a Roth. No earned income required for conversions.

IP
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I thought you could only put work generated income into a Roth IRA.

To make regular contributions, you have to have earned income, which is generally 'work generated'. However, another way to get money into Roth IRAs is to do conversions from money that's already in Traditional accounts, like IRAs or 401(k)s, into the Roth IRA. You will owe taxes on the amount that's converted.

Can I put money from a pension check, or SSI check, or withdrawal from my 457b differed comp account?

Pension check: No
SSI check: No
457 deferred comp: As long as your 457 is allowed to be rolled over into a Traditional IRA (not all are), yes, you can do a conversion to a Roth IRA. It can be done in one step (457 converted directly to Roth IRA) or 2 steps (457 to Traditional IRA, then Traditional IRA converted to Roth IRA) It's usually best to do what's known as a 'trustee-to-trustee' transfer to the IRA, rather than getting the money yourself and then rolling it into the IRA. That's because:
1) You are only allowed to do one non-trustee-to-trustee transfer per year
2) If the 457 administrator sends money directly to you, they are required to withhold a minimum of 20% for taxes

I won't have RMD until 2022 I believe (then only amount over RMD can be placed in a ROTH IRA).

Well, due to the SECURE Act becoming law, you might want to check the date that you are required to take RMDs. If you didn't turn 70 1/2 on or before Dec 31, 2019, the RMD age was increased to 72. So if you thought you had to take RMDs in 2022 because that's the year you turn 70 1/2, you won't actually have to take an RMD until 2023 or 2024. But yes, once RMDs are required, you will need to take the RMD out before you can do conversions to a Roth IRA.

AJ
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transferring should be simple.

Be careful of terminology and understanding of the terms. When someone moves money/stocks from his TIRA to his Roth IRA, ha must distinguish between contributions to his Roth, which have low upper limits or in OP's case might not be allowed (vis., income limits), and conversions from his TIRA to his Roth IRA.

It's necessary to tell the brokerage that this is a conversion and not a contribution. This is some of the "stuff" that's involved.

Eric Hines
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AJ - follow up question:

Using the example amounts noted earlier, how should these transfers be made so as to be "proper" and "legal"?

Would I transfer $15,000 from the TIRA to the regular taxable account and then make another transfer of the $5,000 from the regular taxable account to the Roth IRA?

Or would I transfer $10,000 from the TIRA to the regular taxable account and then make a second transfer of the $5,000 from the TIRA account to the Roth IRA?

Or does it make any difference?
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Would I transfer $15,000 from the TIRA to the regular taxable account and then make another transfer of the $5,000 from the regular taxable account to the Roth IRA?

No:the instant the money leaves the TIRA to go to anything other than another TIRA, it becomes taxable. But furthermore, unless you have enough (but not too much) earned income, you may not be allowed to put it into the Roth IRA.

Or would I transfer $10,000 from the TIRA to the regular taxable account and then make a second transfer of the $5,000 from the TIRA account to the Roth IRA?

This way, you pay the tax on the $10,000 and the $5,000, but you should be able to roll the $5,000 over to the Roth IRA without a problem.

N.B.: I am not a tax attorney.
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JeanDavid -

As discussed up-thread, it's already understood that taxes will theoretically have to be paid on the full $15,000. But in the situation that is being dealt with here, due to other factors (income level, deductions, etc) the bottom line is that no added taxes will actually be paid.

I'm simply asking here if it makes any difference if the money withdrawn from the TIRA should or should not be passed through the "regular" taxable brokerage account.
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No:the instant the money leaves the TIRA to go to anything other than another TIRA, it becomes taxable. But furthermore, unless you have enough (but not too much) earned income, you may not be allowed to put it into the Roth IRA.

This is not correct. A non trustee-to-trustee rollover or conversion is allowed every 12 months. As long as the distribution is redeposited either as a rollover or conversion within the 60 day period then it is NOT a contribution but a rollover or conversion.

Be very careful with distribution to rollover/conversion and make certain that you meet the requirements. Mistakes can be expensive.
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Using the example amounts noted earlier, how should these transfers be made so as to be "proper" and "legal"?

Would I transfer $15,000 from the TIRA to the regular taxable account and then make another transfer of the $5,000 from the regular taxable account to the Roth IRA?

Or would I transfer $10,000 from the TIRA to the regular taxable account and then make a second transfer of the $5,000 from the TIRA account to the Roth IRA?

Or does it make any difference?


What is your goal: to fund your ROTH IRA or to convert funds from a TIRA to a ROTH?

Rollovers and conversions are best done as trustee-to-trustee. It avoids the 60 day rule and the limit of one per 12 month period.
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Numbered them for you:

1) Would I transfer $15,000 from the TIRA to the regular taxable account and then make another transfer of the $5,000 from the regular taxable account to the Roth IRA?

2) Or would I transfer $10,000 from the TIRA to the regular taxable account and then make a second transfer of the $5,000 from the TIRA account to the Roth IRA?

Or does it make any difference?


Legally, you *can* do choose either one - except, if you choose #1, it's considered a rollover, and you are only allowed one of those in a year. So if you choose #1, you have to wait a full year (i.e. if the money gets to the Roth IRA on March 4, 2020, you have to wait until March 5, 2021) before you can complete another rollover. So it's probably better to follow process #2 - doing 2 separate transactions.

Using process #2 is also less likely to prompt questions from the IRS about the 1099s you will get.

AJ
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What is your goal: to fund your ROTH IRA or to convert funds from a TIRA to a ROTH?

As explained up-thread, the idea is to withdraw as much from the TIRA as possible without paying any income tax and then putting the amount in excess of the RMD into the Roth IRA to enable any further investing to be done tax free.

In the example given, the RMD is $10,000. The extra $5,000 can be withdrawn without incurring any tax payment. So that $5,000 could be "converted" to the Roth for future investment.
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OK AJ, thank you. I'll go with the 2nd process.
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No:the instant the money leaves the TIRA to go to anything other than another TIRA, it becomes taxable.

Not necessarily. You can do things like roll money from a TIRA to an HSA (once in your lifetime) or do a QCD (if you are at least 70 1/2) where money can leave a TIRA and it's not instantly taxable.

But furthermore, unless you have enough (but not too much) earned income, you may not be allowed to put it into the Roth IRA.

Sorry, that's not correct. As was already mentioned in this thread:

You DO NOT have to have earned income to do a conversion from a Traditional IRA to a Roth IRA. If you transfer money that's more than your RMD to your checking account, and, within 60 days, transfer that amount into a Roth IRA, you've done a rollover conversion. This is perfectly legal, as long as you wait a full year between doing rollover conversions.

This way, you pay the tax on the $10,000 and the $5,000, but you should be able to roll the $5,000 over to the Roth IRA without a problem.

You will pay taxes on the full $15,000 either way, and you won't have any problem getting money into the Roth IRA either way, as long as you follow the timing rules.

AJ
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AJ pretty well answered your questions. But I'm going to get picky on terminology. When you talk to your broker to deal with these transactions, getting the terminology right can be the difference between a successful (as in accomplishing what you wanted to do) and unsuccessful transaction.

For the RMD portion, you can call it the RMD or a distribution or a withdrawal.

Likewise, with the portion going from your traditional IRA to the Roth IRA, use the word "convert" or "conversion".

Both of these might be called a transfer (as you did in your question), but as you can see, that's not a good description of the transactions you are trying to accomplish.

--Peter
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Peter -

Yes, I do understand that moving the money from the TIRA to the Roth IRA is a "conversion". But thank you for bringing it up.
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In the example given, the RMD is $10,000. The extra $5,000 can be withdrawn without incurring any tax payment. So that $5,000 could be "converted" to the Roth for future investment.

No, every dollar coming out of a traditional IRA is taxed. In the example given, with a $10,000 RMD and a $5,000 conversion to a ROTH, tax must be paid on all $15,000. That doesn't mean the full $5,000 can't go into the ROTH, it just means the taxes have to be paid from somewhere. Paying it from the RMD in this example would be the obvious source.
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As explained up-thread, the idea is to withdraw as much from the TIRA as possible without paying any income tax and then putting the amount in excess of the RMD into the Roth IRA to enable any further investing to be done tax free.

To further complicate things, (not that this is actually complicated,) when you do your Roth conversion of the excess of the RMD they will also ask if you want taxes withheld from that transaction. You have the choice of paying the taxes from a taxable account allowing the whole $5K to be rolled over into the Roth or have the taxes withheld and sent to the IRS from the rollover amount and putting the remainder after tax into the Roth.

The way I see it is from the $15K:

1. $10K RMD goes to taxable account and you can have the taxes withheld without it impacting a benefit.

2. $5K excess over RMD transferred to a Roth via CONVERSION, (I personally would do direct and not take it in to a taxable account first. This was seriously easy at Fidelity where we already have both a Traditional and a Roth IRA, simply requiring a few clicks of the mouse.) Here you have the option of their taking the taxes from the amount you are converting and putting the $5K-taxes into the Roth, or paying taxes from another account, (either in an estimated tax payment to avoid penalties of late payment or directly to the IRS in your return if penalty not an issue,) which allows the full $5k to be converted into the Roth for tax free accumulation.

Keep in mind also the stretch inherited IRA is no longer a thing for non-spouses, so if you are looking to do this for estate issues, it's of limited value. As of last month non-spousal IRAs have to be cashed out within 10 years of inheritance. Completely torpedoed our estate plan for the kids.

IP,
now doing Roth conversions up to the 24% tax bracket to avoid high levels of taxes of a minimum of 25% when RMDs hit, and to avoid Uncle Sam from getting more of our IRAs than necessary when our kids, one of whom is already in a high tax bracket, inherit.
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Here you have the option of their taking the taxes from the amount you are converting and putting the $5K-taxes into the Roth, or paying taxes from another account, (either in an estimated tax payment to avoid penalties of late payment or directly to the IRS in your return if penalty not an issue,) which allows the full $5k to be converted into the Roth for tax free accumulation.

A third possibility for taxes as mentioned in another post is withholding the entire amount of taxes for the full $15K from the RMD. That would be really great if your brokerage would do that.

IP
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A third possibility for taxes as mentioned in another post is withholding the entire amount of taxes for the full $15K from the RMD. That would be really great if your brokerage would do that.

That would be easy at my broker. When I make a withdrawal from my IRA I specify a percent goes to the feds, another percent that goes to the state. As far as I know I could make them add up to 100% if I chose to. If I ever have to do a quarterly payment that's how I figure on doing it with no paperwork. (I am years from RMD. When I did a conversion to my ROTH I had to talk with them on the phone because I wanted taxes held out - their default was no withholding on a conversion.)
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When I make a withdrawal from my IRA I specify a percent goes to the feds, another percent that goes to the state. As far as I know I could make them add up to 100% if I chose to. If I ever have to do a quarterly payment that's how I figure on doing it with no paperwork. (I am years from RMD. When I did a conversion to my ROTH I had to talk with them on the phone because I wanted taxes held out - their default was no withholding on a conversion.)

Other than RMDs from an inherited IRA we have made no deductions from our IRAs. While our Roth conversion last month was a taxable event, we did not wish to have the taxes withheld from the conversion funds as that would lower the amount of the Roth conversion. Instead we are paying the taxes due from taxable funds. We have had to do estimated tax payments this year as DH does not have an employer, but we knew we would be doing conversions up to the top of the 24% tax bracket so we simply assumed that much income and paid the taxes on it quarterly.

Fidelity would have taken the tax money out of the conversion funds had we asked. Not sure they would have taken them from a taxable account, or indeed an RMD, had we been taking them from our accounts.

IP
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That would be easy at my broker. When I make a withdrawal from my IRA I specify a percent goes to the feds, another percent that goes to the state. As far as I know I could make them add up to 100%

100% isn't possible. I tried. At least 90% was allowed.
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I imagine the RMD is going to get complicated if we have multiple retirement accounts. Glad they moved it to 72 and we’ll see what the laws are in 17 years.

Ideally I’d like a small recession after we both retire to get a conversion from regular to Roth with minimal taxes. I can dream.

Wasn’t it Mitt Romney who somehow got tens of millions into a Roth account? Anyone know his financial/tax guy? That guy should write a book.

Suddenly people around us are starting to retire in droves. 55 years old. Husband has suddenly become more interested in the details.....
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I imagine the RMD is going to get complicated if we have multiple retirement accounts.

It is possible to make it complicated. Most of not all Administrators calculate the RMDs for accounts under their control. An easy option is to take the calculated amount for each account.

This avoids any concern about taking distributions from the correct type of account. A common mistake is to take the total of RMDs from one account and not realize that a distribution from a TIRA doesn't count for a 403b or any different type of retirement account. I suspect it probably wouldn't count for an inherited IRA.
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I suspect it probably wouldn't count for an inherited IRA.

Your suspicion is correct. Inherited IRAs with RMDs* (generally, those inherited by non-spouses) require that the RMD be taken from the inherited IRA.

*IRAs inherited by non-spouses on or after Jan 1, 2020 no longer have RMDs. Instead, the inherited IRA account must be entirely disbursed in 10 years, per the SECURE Act, with a few exceptions for non-spouse beneficiaries who are minor children or disabled.

AJ
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Inherited IRAs with RMDs* (generally, those inherited by non-spouses) require that the RMD be taken from the inherited IRA.

This raises a related question. Do the RMDs from an Inherited IRA count toward the RMDs required of a Traditional IRA, or are the two entirely separate?

Eric Hines
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Entirely separate.

AJ
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Do the RMDs from an Inherited IRA count toward the RMDs required of a Traditional IRA, or are the two entirely separate?

Just to be totally clear - Each type of account that has RMDs (TIRA, Inherited TIRA, Inherited Roth IRA, 401(k), 403(b), 457, TSP, Simple IRA, SEP, and any other account with RMDs that I might have missed) requires that the RMD be taken from that type of account. For instance, if you have more than one Traditional IRA in your name, and you are old enough to require RMDs, you can take the RMD from any combination of those Traditional IRAs. The RMD will be based on your age and the total ending balance of the Traditional IRA accounts on Dec 31 prior to the year of the RMD. (If you do have multiple accounts of one type and choose to take the RMD out of only one of the accounts, you will probably get notifications from the administrator(s) of the other account(s), reminding you of your RMD obligation. You should be sure that nothing in your account agreement with the administrator(s) allows them to automatically disburse the RMD, or you will end up with more than the RMD withdrawn.)

However, if you have a 401(k) account, a TSP and a Traditional IRA account, you must take an RMD out of each account. The 401(k) RMD will be based on your age and the balance of the 401(k) as of Dec 31 the year prior to the year of the RMD. The TSP RMD will be based on your age and the balance of the TSP as of Dec 31 the year prior to the year of the RMD. The Traditional IRA RMD will be based on your age and the balance of the Traditional IRA as of Dec 31 the year prior to the year of the RMD.

Also - please note that Roth sub-accounts in employer plans like 401(k)s require RMDs, even though, at this point, Roth IRAs do not require RMDs.* So, if you want to avoid RMDs from your employer plan Roth sub-account, you need to complete a rollover into a Roth IRA on or before Dec 31 of the year before you turn 72.

Another point - if you have 2 of the same type of employer plans (Traditional 401(k), for instance), technically, you could take the total RMD out of just one of the accounts - but it's likely that the plan rules won't allow that - the plan rules likely require you to take an RMD out of that particular plan.

AJ
*Since the SECURE Act aligned several of the previously mis-aligned rules for employer plans and IRAs, I would not be surprised to see a bill that requires RMDs from Roth IRAs at some point in the near future. This would eliminate the ability for Roth IRAs to grow tax-free for the owner's lifetime, and would move money from tax-free accounts to taxable accounts, increasing tax revenues.
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