Year-End RMD Question: Can I Transfer my Traditional IRA RMD to a Roth?

By Joe Cicchinelli and Beverly DeVeny
Follow Me on Twitter: @theslottreport 
Editor’s Note: The Slott Report is off on holiday break until Monday, December 29. Happy Holidays!

The major Qualified Charitable Distribution (QCD) announcement pushed off last week’s Slott Report Mailbag until this week, and it couldn’t come at a better time. With 2014 hanging on by its coattails, year-end retirement planning is nearing its conclusion. In crunch time, advisors and consumers are asking specific questions about taking required minimum distributions (RMDs). It’s only fitting that we received two questions on the topic this week.

1.

Dear Ed,

Per IRS publication 590, am I able to transfer my annual RMD from my traditional IRA to open a Roth IRA?

Harry Thompson
Tucson, AZ

Answer:
No. RMDs are not eligible to be converted to a Roth IRA or rolled over to another retirement plan. However, if you are eligible to make a Roth IRA contribution, you can use funds from your IRA distribution to make a Roth IRA contribution.

2.

My traditional IRA account consists of mutual funds and a money market account. I would like to convert the entire portfolio to a Roth IRA account and then do a partial recharacterization if the conversion bumps me into the next tax bracket. Can I recharacterize just the dollar amount I need to avoid the bump? How do I account for earnings on the converted funds?

Thank you.

Answer:
A recharacterization is always done by a dollar amount, plus or minus the attributable gains or losses, of any amount you decide to recharacterize. A recharacterization is nontaxable. The funds are treated as though they never left the traditional IRA and the attributable gains or losses occurred in the traditional IRA.

3.

If one is currently taking his scheduled RMD, and decides to roll over his IRA to a Roth, must he still take the scheduled RMD before the rollover? If the individual has already rolled over his IRA to the Roth without first taking the RMD, can he transfer the RMD amount back to his IRA and then make the appropriate RMD distribution from his reconstituted IRA?

Answer:
Yes, you must take your RMD before the rollover (conversion) to a Roth IRA. If you erroneously rolled over your RMD to a Roth IRA, that amount is treated as a regular Roth IRA contribution, which may create an excess Roth IRA contribution. An excess contribution is subject to penalties unless timely corrected. You must tell the Roth IRA custodian that you are taking a distribution of an excess contribution. Either the custodian or you will have to do a net income calculation on the amount of the excess contribution. The net amount is then distributed from the Roth account. This is the only way to fix the problem of mistakenly converting your RMD amount to a Roth IRA. You have until October 15 of the year after the excess contribution to correct it. If it is not timely corrected, the excess amount is subject to a penalty of 6% per year for each year that it remains in the Roth IRA.