Roth Conversion prior to RMD / multiple IRA’s
A client over age 70-1/2 has multiple IRA accounts. We processed a roth conversion of one of the IRA accounts. RMD’s for the current year have not been taken yet. The plan was to cover all RMDs from just one of the other IRA accounts. Per the IRA custodian, the RMD should have been processed prior to the conversion, even though the RMD will not be coming from the account converted, and is telling us we need to process a removal of excess to cover the RMD for the account converted.
Does the RMD need to be processed prior to conversion, even though the RMD will be coming from one of the IRA accounts NOT being converted?
Permalink Submitted by Alan Spross on Tue, 2012-06-26 18:43
Yes, the custodian is correct.
The first distribution taken from ANY TIRA in an RMD distribution year is deemed to apply toward the RMD. A conversion is a distribution and rollover to a Roth IRA, but the RMD is not eligible to be rolled over. Therefore, the client has already taken the RMD, but then rolled it into the Roth IRA as part of a conversion.
If the conversion was larger than the RMD, then the RMD amount is considered an excess regular contribution to the Roth IRA and must be corrected like a typical excess contribution. An earnings calculation would be done on the RMD amount and the net total distributed to the client. If the client then wants to bring the conversion back up to the former total, an additional conversion can be done from the other IRA account originally intended for the conversion.
Client will end up with taxable income for both the RMD, the additional conversion, and any earnings while the RMD amount was in the Roth IRA. The total result will not result in any increase in taxes unless there were earnings in the Roth IRA. So this is more of a processing and reporting hassle than anything else.
Final 1040 will show the total distributions on line 15a, and taxable amount on 15b. The 8606 form reporting the conversion will be the same as otherwise if the additional conversion is done to bring the total conversion up to the intended total amount. If not done, the conversion reported would be reduced by the amount of the RMD and show only the amount in excess of the RMD.