Calculating the RMD of an IRA that has been recharacterized
Example:
IRA conversion to a Roth in November 2010. In September 2011, the Roth is recharacterized back to the IRA because it has declined in value.
How do you calculate the 2011 RMD? Is it on the December 31, 2010 Roth balance, or the recharacterized amount that went back into the IRA at the lower value.
November 2010 Roth conversion value–$1M
December 31, 2010 Roth value–$1.2M
Recharacterization value back into IRA– $800K.
Thanks
Paul
Permalink Submitted by Alan Spross on Wed, 2011-09-28 19:19
The 12/31/2010 TIRA value would be increased by 800k.
Here is a copy of the IRS Reg:
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(b) Recharacterizations. If an amount is contributed to a Roth IRA that is a conversion contribution or failed conversion contribution and that amount (plus net income allocable to that amount) is transferred to another IRA (transferee IRA) in a subsequent year as a recharacterized contribution, the recharacterized contribution (plus allocable net income) must be added to the December 31 account balance of the transferee IRA for the year in which the conversion or failed conversion occurred.
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Note: “plus allocable net income” is intended to reflect losses as well as gains while in the Roth IRA. I imagine that the effort to simplify the RMD Regs in 2001 led to the decision to use the actual amount moved back to the TIRA as the 12/31 amount even though it would be more equitable to determine the actual 12/31 amount. Since many conversion Roth accounts hold assets existing prior to the conversion, the IRS apparently decided to avoid the need for a special calculation to determine what the converted amount value would have been on 12/31. Therefore, the actual amount moved that would agree with the 1099R is the amount the 12/31/10 value would be increased to determine the 2011 RMD.
Therefore, in this case the 2011 RMD would be less than it would have been had the conversion never been made in the first place (assuming same investments).