Roth Conversion before RMD

Submitted by CARROLL WILLIAMS on Sat, 2016-04-09 03:51

Last month I decided to convert all of my TIRA (#1), one of three TIRAs, to a ROTH, Soon after I realized that I had not done any RMDs. Normally I take all three RMDs from TIRA(#3). Can I do that again this year or do I need some corrective action?



Submitted by Alan - IRA critic on Sat, 2016-04-09 04:20

  • The distribution from the TIRA is deemed to satisfy the RMD, so your RMD has been completed. However, the RMD amount was not eligible for rollover and became an excess regular Roth contribution. Explain to the Roth custodian what happened and request a return of the excess amount with allocated earnings. The earnings will be taxable, but will be small so this is not costly. However, it is messy to report on your tax return because what you report will vary from the 1099R for the conversion. You will only report the allowable amount of the conversion on Form 8606, so the total taxable amount on line 15b will be your allowed conversion amount plus the excess contribution amount plus the earnings on the excess amount returned to you.
  • You can satisfy your total RMD from just one account, but you must complete that before converting any additional amounts. In other words, the total RMD must be withdrawn from any account you wish, and afterwards you can convert more from any account you wish.

 

Submitted by CARROLL WILLIAMS on Sat, 2016-04-09 14:07

Thanks Alan.  Just to be sure–Are you saying that the RMDs for TIRA #2 and #3 are not involved in this correction?   Can this return of excess Roth contribution be a QCD or would that be improper?     Thanks again 

Submitted by Alan - IRA critic on Sat, 2016-04-09 18:24

  • With respect to your RMD amount, you should determine the RMD for each IRA account, then add them up. The total RMD can be taken in any combination from these accounts, so you could satisfy it by taking that total distribution from a single account and not taking a distribution from the others. Therefore, if your conversion was as much as your RMD total for all accounts, your RMD is satisfied. For example. if your RMD total was 17,000 and you converted 20,000, then you have an excess contribution of 17,000. The 3,000 is OK and is not an excess contribution so does not need to be removed from the Roth IRA. Note that whichever TIRA account you take a distribution from, that is credited against your total RMD, since for RMD calculations all your TIRA accounts are treated as one combined account. There is no need to touch 2 and 3 as long as your RMD amount has been satisfied from Account 1.
  • A QCD can be more or less than your RMD, but not more than 100k. It is reported as a normal distribution and rollover on your tax return. A corrective distribution is not a normal distribution, it has it’s own distribution code and cannot be rolled over. Therefore, you cannot have the excess contribution corrective distribution transferred to a charity as a QCD.

Submitted by CARROLL WILLIAMS on Sat, 2016-04-09 19:33

Alan,  thanks for clarifing the no on QCD.  I do not want to take the RMDs for TIRAs #2 and #3 at this time nor consider them taken if I don’t have to.  I just want to remove the excess Roth contribution equal to the missed RMD on TIRA #1.  I will plan to timely do the other RMDs.  Will this be proper?

Submitted by Alan - IRA critic on Sun, 2016-04-10 00:34

I don’t think I got my point across. Did you total the RMD amounts required from all 3 accounts, and was your conversion at least equal to that amount?  If so, your RMD for all accounts has been satisfied. But since you cannot roll over the RMD amount in a conversion, you must remove the amount equal to the RMD from your Roth IRA. Amounts you converted that exceed the total RMD amount can remain as a Roth conversion. 

Submitted by CARROLL WILLIAMS on Sun, 2016-04-10 02:47

Alan, I will try to clear this up by sharing the numbers.  The #1 TIRA RMD is $707.  The total RMD for all 3 TIRAs is$3655.  The Roth Conversion of #1 TIRA was $18074.  Are you saying that I have no choice, that my full RMD for all 3 TIRAs must be removed as excess Roth Conversion, not just the $707 for TIRA #1?

Submitted by Alan - IRA critic on Sun, 2016-04-10 16:22

  • Yes, exactly. Your total RMD is 3655, so the first dollars of any distribution or conversion applies against that RMD. SInce your conversion was much larger than the RMD, most of it can remain, but you must request that 3655 plus allocated earnings must be withdrawn from the Roth IRA, since that is the RMD amount that was not eligible to be converted. The rest of the conversion is fine and can remain in place.
  • The above procedure will restore the situation to what should have happened, which was to withdraw the RMD amount from any of the IRA accounts you wanted to, and after that was done you can convert any additional amount you wanted to. You end up with 3655 in your checking account and a conversion of 14,419. to be reported on Form 8606. Again, this will cost you very little. For example, if you had a 5% gain on your conversion then a gain of 183 would have to be distributed along with the 3655. The 183 would be taxable for 2016. If you had no gain or a loss on the conversion up to the date of the corrective distribution, there would be no tax at all. But explaining what you need done to the Roth custodian to get them to process the corrective distribution could be a challenge if you are not dealing with a large brokerage firm that has staff that understands these rules. You should tell the custodian –  “I converted my RMD in the amount of 3655, so I need to have this treated as an excess regular Roth contribution and returned to me with allocated earnings”. If they do not understand this, ask to talk to more senior staff.
  • You do not have to worry about the reporting until next Feb after you receive the 1099R forms for the conversion and for the corrective distribution. Then you can post back here if you wish for guidance on how to report this.
  • There is another option for correcting this if you wanted to consider it. That involves recharacterizing the entire conversion back to TIRA and starting over. There would be no corrective distribution needed. You probably would not do that unless you had a significant loss on your conversion. You have plenty of time to decide which way to go with this. For example, you might wait until late this year to decide whether to do the corrective distribution or do the recharacterization.

Submitted by David Mertz on Sun, 2016-04-10 17:52

Based on CFR 1.408-8 Q&A-4, I think that only the $707 RMD attributable to TIRA #1 was required to be distributed from TIRA #1 before rolling over or converting TIRA #1.  This would mean that only $707 of the amount rolled over to the Roth IRA is excess contribution in the Roth IRA.  However, I don’t think that there would be any problem requesting a return of contribution of $3,655 from the Roth IRA to satisfy the RMDs for TIRAs #2 and #3 as well since Sec. 408(d)(4) refers to the return of *any* contribution, which I believe would include the deposit into the Roth IRA that was the result of the Roth conversion.  Of course if only $707 was returned from the Roth IRA, it would mean that $2,948 of 2015 RMD would still need to be satisfied from TIRA #2 or #3, which is not the desired result.

Submitted by CARROLL WILLIAMS on Sun, 2016-04-10 19:15

My goal is to keep my income to a mimimum because of the effect on causing more SS to be taxable and the effect on state taxes.  I wanted to stay below a set limit.  I hoped to accomplish this by doing this small Roth Conversion and doing most of my RMDs as QCDs.  I didn’t know that recharacterizing was  an option, considering that part of the Roth is now considered Excess Contribution.  The next best solution for me is to only return the $707.  Of coure I only want to do what is legal.  So difficult to learn all the rules.

Submitted by Alan - IRA critic on Mon, 2016-04-11 04:23

  • The rules are extremely confusing when you combine RMDs, conversions and QCDs using multiple accounts. I agree with Dmx after reviewing the Reg that he pointed out. Your conversion only includes an excess contribution of 707 contrary to what I posted earlier. You said “most of my RMD as QCDs”, which I interpret to mean that you want to keep some of the RMD, so your QCD would be less than your RMD. To accomplish this with the simplest option, you should first complete your QCD for the amount you want, then take the rest of your RMD, and last convert whatever additional amount you wish, all 3 of these from IRA #1. You can leave 2 and 3 alone. This is for future years. This year you have to correct the infraction already committed, so the procedures are different.
  • I need to have a separate post to DMx so we can resolve your best course of action and will get back to you. I think so far all you have done is the conversion, so we need to correct the current 707 excess, then determine how best to complete the QCDs and remainder of the RMD.

Submitted by Alan - IRA critic on Mon, 2016-04-11 04:44

DMx, I think this Reg was probably meant to reduce excess contributions, but it definitely has some interesting implications. For one, it means that with numbers like the OP has, if he takes a distribution up to 3655, it satisfies the total RMD for all IRAs, but as soon as some part of it is rolled over (or converted), the RMD is reduced to just the amount of the RMD for the IRA funding the distribution, and the remainder of the RMD is not completed. Now only the 707 is excess, so the rest of the 3655 is not excess and cannot be treated as a regular Roth contribution. Suggested solution to accomplish all requirements:  1) Recharacterize entire conversion to new IRA 4 and start over.   2) Do desired QCDs from IRA 1   3) Distribute 3655 less the QCD already distributed from IRA 1; RMD for all 3 IRAs now complete.  4) Do the amount of conversion desired from IRA 1 which would not be a disallowed reconversion because the recharacterization money sits in IRA 4, which is why IRA 4 must be opened. Make sense? 

Submitted by CARROLL WILLIAMS on Mon, 2016-04-11 12:23

I would be very satisfied if my situation was totaly fixed by only removing the $707 from the Roth Conversion.  Please tell me which Reg allows me to do this?  The amount left in the Roth Conversion would be enough for my 2016 plans.  I could then begin to taking QCDs from TIRAs #2 and #3 untill  I have met the RMDs for TIRAS #2 and #3.  Next year i will meet my RMDs first.   

Submitted by David Mertz on Mon, 2016-04-11 13:10

  • Alan, I guess the question is whether or not section 408(d)(4) allows the return of a rollover contribution, and by extension, the return of a Roth conversion, or only the return of regular contributions.  I don’t think I’ve heard of section 408(d)(4) being applied to anything but regular contributions.  If it only allows the return of regular contributions, only $707 could be distributed from the Roth IRA as a return of contribution.  CFR 1.408-4(c) refers only to returns of *excess* contributions, so maybe section 408(d)(4) only applies to regular contributions.
  • Given that the return of $707 and satisfying TIRA #2’s and #3’s RMDs from one or both of TIRA #2 and #3 is an acceptable solution, it seems that the question of whether or not 408(d)(4) can be applied to remove $3,655 is moot.
  • Satisfying the late 2015 RMDs for TIRA #2 and TIRA #3 with a 2016 QCD from either TIRA #2 or TIRA #3 (or both) doesn’t seem to present any issues.

Submitted by [email protected] on Mon, 2016-04-11 14:15

Is this (CFR 1.408-8 Q&A-4) a new rule, allowing a conversion of one IRA to NOT apply to RMDs of other IRAs?  I had thought all IRAs RMDs were aggregated and considered taken by any one or combination of all IRAs.This would suggest a new planning opportunity that I was not aware of.-m

Submitted by Alan - IRA critic on Mon, 2016-04-11 18:17

  • It is not new. I had read it before but misinterpreted it because of the IRA RMD aggregation rules. This Reg creates sort of a hybrid situation between the RMD rules for qualified plans that do not have aggregation with other accounts and the IRA aggregation rules by allowing a single IRA account distribution to only apply to the RMD for that particular IRA account once a rollover is done (conversion also being a rollover). If not rolled over, then the usual aggregation rules apply under which the distribution is applied to the RMDs for ALL owned IRA accounts. This feature is not explained in any IRS Pub and I have never seen it mentioned in associated articles so add this one to the list of things the IRS feels is better off remaining obscure.
  • Perhaps the intent of this Reg was to reduce excess contributions for people in the exact situation of the OP, who would generally think that a conversion does NOT satisfy the RMD and therefore they still expect to finish their RMD in a later distribution from either the same or a different IRA account. But it still creates an excess contribution to the extent of the RMD for the converted TIRA account, so a corrective distribution would still be necessary, but a smaller one than if this Reg did not exist. What planning opportunity do you foresee here?

Submitted by [email protected] on Tue, 2016-04-12 13:01

Not sure, but what if you had 3 IRAs and you wanted to do conversions.  Conversions are best at the beginning of the year, while RMDs are best at the end of the year.  Why not do the RMD from IRA #1 and then do the conversion from IRA #1 (either separately or all at once followed by a excess contribution withdrawal from Roth) and then do the RMDs from IRA #2 and/or IRA #3 at the end of the year?  Would that work?-m

Submitted by Alan - IRA critic on Tue, 2016-04-12 21:28

  • Yes, that would work. Since you plan on taking the RMD for IRA 1 before converting, there would be no excess contribution. If you converted from IRA 1 before taking the RMD, there WOULD have been an excess contribution, but only for the amount of the IRA 1 RMD, not all 3 RMDs.
  • I think when you refer to “RMD from IRA 1”, you actually mean “RMD FOR IRA 1”, since you can take RMDs from any of the account, but the rule cited by DMx limits the excess contributions to the extent of the RMD on the account that funded the conversion.
  • I really think this Reg causes more complexity than it is worth. For example, suppose a taxpayer does some TtoT transfers between his IRA accounts for investment reasons. The RMD for the accounts is based on the prior year end balance, so these transfers could make result in that RMD having a very different relation to the account balance in that IRA at the time a conversion is done.
  • To expand on your planning opportunity then, you might take the IRA with the smallest balance on prior year end, then do transfers into that IRA to bring the balance high enough to fund the desired conversion. Then take the small RMD and do the conversion. You have now taken out the smallest RMD possible and still done your full conversion early in the year. Since the aggregation rules still apply, you then take the bulk of the RMD from the other 2 IRA accounts late in the year. So there is a planning opportunity for anyone who wants the extra work and expects the market to rise throughout the year, but of course, the market could easily derail the intent of this plan.

Submitted by [email protected] on Tue, 2016-04-12 21:37

I like the idea you added about using the “smallest” IRA as the one to work with.  Agree that the added comlexity may make it not worthwhile, but still interesting.-m

Submitted by David Mertz on Tue, 2016-04-12 23:50

I must mention that I learned of 1.408 Q&A-4 here, where my initial reaction was, “Huh?,” and I had to research it for myself to understand why it was true:  https://irahelp.com/slottreport/how-do-i-handle-my-rmd-multiple-retirement-accounts-converting-roth-ira

Submitted by CARROLL WILLIAMS on Sat, 2016-04-30 14:15

I just realized that I never did really send my thanks for the effort every one put into arriving at the final answer.  I really appreciate the help I received.  Thank you so much.

Submitted by Bruce Steiner on Sun, 2023-02-05 20:56

  • Where does the money go?  Back to the traditional (and then the IRA owner takes the RMD from the traditional)?  Or directly to the IRA owner?
  • For example, suppose an IRA owner will be 73 in 2023.  She didn’t have any money in her traditional IRA at the beginning of 2022, so she didn’t have an RMD for 2022.  She contributed $7,000 to her traditional IRA in 2022.  (She isn’t eligible to deduct it, and she wasn’t eligible to contribute directly to a Roth.) 
  • She converted her entire traditional IRA in January 2023, forgetting to first take her 2023 RMD (her 12/31/2022 balance divided by 26.5).  
  • Vanguard will let her withdraw the excess contribution (the RMD amount, plus a pro rata share of the income and growth) by sending her a check, but they won’t let her move it back to her traditional IRA.  Is that OK?  It seems to make sense because she should have withdrawn it first.
  • Of course, she could have avoided this by converting by the end of December 2022, or waiting until early 2023 to make her contribution for 2022 and then converting.

Submitted by Alan - IRA critic on Mon, 2023-02-06 00:38

  • Prior posts in 2016 to this thread may now be invalid due to two rules changes. FIrst, recharacterizations of conversions ended in 2018. In addition, the prior “loophole” that allowed a conversion by a multiple IRA owner when the total RMD had not yet been completed has been eliminated by the proposed Secure Act rules (p 253) released one year ago. That provisions is copied below.
  •  “if a minimum distribution to an IRA owner is required under section 401(a)(9)(A)(ii) for a calendar year, any amount distributed during a calendar year from an IRA of that IRA owner is treated as a required minimum distribution 254 under section 401(a)(9) to the extent that the total required minimum distribution for the year under section 401(a)(9) from all of that IRA owner’s IRAs has not been satisfied (either by a distribution from the IRA or, as permitted under paragraph (e) of this section, from another IRA).”
  • Currently, if any portion of an RMD is converted, that portion is a failed conversion and the RMD has been satisfied at the time of the failed conversion.  The RMD portion must be reported as a distribution and not a conversion since failed conversions cannot be reported as conversions. Therefore the amount that was converted to Roth must be removed as an excess regular Roth IRA contribution. 
  • In the above example of a 7000 ND contribution done in 2022 that resulted in a 2023 RMD of around $350, all but 350 of the conversion is allowed and reported as a conversion, but the 350 must be reported as a non taxable distribution on Form 8606 since it is the 2023 RMD. It also must be removed from the Roth IRA as an excess regular Roth IRA contribution. 
  • The corrective distribution from the Roth cannot be rolled over since it was treated as an excess contribution to the Roth. It’s the TIRA RMD, therefore should remain distributed.

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