Calculating 2011 RMD on a RIRA Conversion Recharacterized
We have a client who converted her Traditional IRA to a Roth IRA on 12/29/2010. Now she wants to recharacterize. She turns 70 1/2 this year. This will require her to take an RMD in 2011.
What is considered the year-end value upon which the RMD is based:
1. When a conversion happened prior to year-end 2010
2. A recharacterization takes place months later in 2011 and
3. The client must take an RMD in 2011?
Do we calculate growth for the period between 12/29/10 – 12/31/10 and include that in the amount converted to arrive at the value of the IRA in order to calculate the RMD?
What if the conversion had happened in June 2010 and the recharacterization takes place in early 2011? How would we arrive at the value of the IRA?
Thanks!
Permalink Submitted by Alan Spross on Wed, 2011-03-02 20:04
You won’t know the final 12/31/2010 value until the recharacterization is done. At that point you just add the amount that transfers back to the TIRA to the value of the TIRA on 12/31/2010. You should not try to determine what the value of the conversion was on 12/31. Another way of putting this is that the investment results of the conversion while in the Roth IRA are imputed to have occurred on 12/31/2010. This increases the RMD if there are gains and reduces it if there are losses. Since most recharacterizations are now done due to losses, this actually reduces most RMDs vrs what the RMD would have been had there been no conversion done.
Of course, for this client the RBD is 4/1/2012, so she can determine if it is to her advantage to take her first RMD in 2011 or 2012. But the 2011 distribution year RMD will be based on the result described above.
Are you sure she should recharacterize at all? If there are equities in the conversion, she probably has gains on it which will become taxable if they are recharacterized back to the TIRA. That would also increase the 2011 RMD as well as subsequent RMDs. And if 2010 is not a good year for additional taxable income, she can defer the conversion income to 2011 and 2012.
Finally, if she still decides to recharacterize, there is a waiting period for a reconversion of the same assets of 31 days after the recharacterization. And if she were to reconvert in 2011, she would have to take that 2011 RMD before reconverting.