RMD and recharacterizations
Client coverted IRA assets in 2010 and was over 70.5. They took their RMD before converting. Now the market is down and the client wants to undo/rech the 2010 conversion back to the IRA. How is the 2011 RMD calculated? Is this based on the roth ira balance which will be rech back to the IRA or do you take the amount that was rech, which is now at a loss.
IRS Pub 590, page 34 seems to say the rech amount (including earning). It is under the outstanding rollovers and rech section which usually means it was done over year end.
Thank you.
Permalink Submitted by Alan Spross on Fri, 2011-08-26 21:37
Good question and this should be surfacing quite often now given the huge number of 2010 conversions done, many of which are now in red ink.
The IRS Regs refer to adding back the balance for recharacterizations and outstanding rollovers. The rollover part is easy to value because it will always be the dollar amount that was distributed. Not so for recharacterized regular or conversion contributions to a Roth IRA, both of which accrue earnings or losses when the funds are in the Roth account. Since the IRS Regs refer to the earnings, the question is whether those earnings need to be valued as of 12/31 or just at the time the recharacterization is completed as reflected on the 1099R for the recharacterization. I would guess that the the IRS would expect to go by the 1099R, even though it can produce a figure far different than what the 12/31 value would have been.
Take for example, a 2010 conversion done late last year for 100,000. The market rose toward year end and that converted amount may have reached 110,000 had it never left the TIRA. But recent market volatility may have dropped the value of that conversion to 85,000 and not wanting to pay taxes on a phantom value of 100,000, the taxpayer recharacterizes and will get a 1099R next January showing 85,000 recharacterized. I would base the additional 2011 RMD on an added value of 85,000 for the TIRA of 85,000, not 100,000. Similarly, if the taxpayer recharacterized at the time of a gain (positive earnings), then the RMD should also be based on the added value instead of the amount converted.