conversion in 70 1/2 year
Sorry if the question has been answered before; I don’t follow the forum as often as I used to.
Client turns 70 1/2 in 2010 and wants to do a partial distribution. Most experts indicate that the RMD must be taken prior to a conversion, even a partial one.
If true, the client has lost the option of deferring the first year RMD until 2011. Does someone have a citation to an IRS PLR or Rev. Ruling on this issue? Thanks.
Permalink Submitted by Alan Spross on Mon, 2010-04-12 16:57
Yes, a conversion in an RMD distribution year results in either the date of the conversion being delayed or the date of the RMD being moved up so that the RMD can be taken first. If a client converts first, he is still deemed to have taken his RMD, but the problem is that he has rolled it over via conversion and an RMD is not eligible for rollover. This creates a partially failed conversion which must be corrected, but it does not void the rest of the conversion.
Accordingly, the IRS Reg that addresses this and confirms that the first distribution in an RMD distribution year is deemed to be credited first to the RMD amount is copied below:
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Sec. 1.401(a)(9)-7 Rollovers and transfers
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Q–1. If an amount is distributed by one plan (distributing plan) and is rolled over to another plan, is the required minimum distribution under the distributing plan affected by the rollover?
A–1. No, if an amount is distributed by one plan and is rolled over to another plan, the amount distributed is still treated as a distribution by the distributing plan for purposes of section 401(a)(9), notwithstanding the rollover. See A–1 of §1.402(c)–2 for the definition of a rollover and A–7 of §1.402(c)–2 for rules for determining the portion of any distribution that is not eligible for rollover because it is a required minimum distribution.
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The reference to 1.401(c)-2 above will clarify that an RMD is not eligible for rollover and that is what creates the failed conversion amount.
In summary, the RMD is automatically taken first whether the client intends to or not. Any type of distribution is deemed to include the RMD no matter what the client does with it. So rather than indicating that is MUST be taken first, it would be more accurate to say that is SHOULD be taken first in order to eliminate excess contributions to the Roth and corrective measures such as partial recharacterizations etc.