Roth Conversion When Turning 70 1/2
Client has an IRA at Vanguard, an IRA at Fidelity, and an IRA at BofA (all dollars are pre-tax). She turns 70 1/2 on May 20th, 2012 and we have several questions:
1. Can she convert the full amount of her Vanguard IRA right now since she has not reached her RBD and not have to worry about taking out the RMD prior to the conversion? I don’t think she is required to take the RMD before the conversion, but want to be sure.
2. If she CAN’T do the conversion without taking out the RMD first, can she take out the RMD later in the year from one of the other IRAs she has?
3. If she CAN do the conversion now without having to worry about the RMDs from the Vanguard IRA, will she then only be responsible for the RMDs from the Fidelity and BofA IRA by 12/31 (or by 4/1/13 if she chooses)?
4. If her RMD for 2012 is $20,000 total from all 3 IRAs, can she take $10,000 this year and $10,000 by April 1st, 2013, or is it an all or nothing situation?
Her objective is to execute a full conversion of the Vanguard IRA this month, and then deal with her RMDs from Fidelity and BofA later in the year (or perhaps delay the RMDs until 4/1/13). We want to make sure we are not missing anything during this process.
Thank you!
Permalink Submitted by Alan Spross on Wed, 2012-01-04 22:56
1. Can she convert the full amount of her Vanguard IRA right now since she has not reached her RBD and not have to worry about taking out the RMD prior to the conversion? I don’t think she is required to take the RMD before the conversion, but want to be sure.
Since 2012 is an RMD distribution year, the 2012 RMD for all TIRA accounts must be taken out before any conversions are done with additional funds. The RBD is not a factor in this situation.
2. If she CAN’T do the conversion without taking out the RMD first, can she take out the RMD later in the year from one of the other IRAs she has?
No, the total RMDs must be taken before any conversion is done. It does not matter how the RMDs are split between the various IRA accounts as long as the total RMD is taken out first.
3. If she CAN do the conversion now without having to worry about the RMDs from the Vanguard IRA, will she then only be responsible for the RMDs from the Fidelity and BofA IRA by 12/31 (or by 4/1/13 if she chooses)?
Not applicable, see above
4. If her RMD for 2012 is $20,000 total from all 3 IRAs, can she take $10,000 this year and $10,000 by April 1st, 2013, or is it an all or nothing situation?
The 2012 RMD can be split between IRAs and also by amount in 2012 and 2012 prior to the RBD. But not if any conversion is to be done in 2012, since the entire 2012 RMD needs to be taken out before converting.
If the amount to be converted matches up with the Vanguard IRA balance, perhaps the RMDs should be satisfied from the other IRAs to include the Vanguard RMD amount. Then explain to Vanguard that their indicated RMD has been taken from another IRA and therefore the entire VG IRA can be converted.
Sounds like the conversion should have been done prior to year end 2011, as there would be no RMDs to be taken in 2011 that would increase taxable income. Of course, if her income was otherwise higher in 2011 than in 2012, then converting in 2011 may not have been advisable.
Once a taxpayer reaches RMD age and wishes to convert, the result is moving up the RMD date and/or moving back the conversion date so the RMD can be taken care of first.
Permalink Submitted by Jonathan Sard on Thu, 2012-01-05 18:17
If she also has a 403b with TIAA CREF that she is leaving in the 403b, am I correct that she does not have to consider those dollars as it relates to the conversion of the IRA since the 403b is a different type of retirement plan so it is categorized separately from the IRAs? (She plans on taking the RMD from the 403b early next year since her RBD is April 1st, 2013.
Permalink Submitted by Alan Spross on Thu, 2012-01-05 20:29
That is correct. She does not have to take the 403b RMD before converting from a TIRA to a Roth IRA.