Basis Isolation in RMD year

Submitted by Mhotchkiss on Fri, 2016-09-09 13:10

So, client has a $150,000 TIRA and turned 70 1/2 this year. RBD is 4/1 next year. TIRA has 75,000 basis in it. We want to isolate the basis by converting the basis to Roth and transferring the balance to his qplan by end of year. I understand he must take his RMD first. Is that correct? RMD is $5,000. So, if we take the RMD, it will be subject to pro-rata formula. How do we do that and then update the remaining basis so that we then convert the basis and move the remainder via transfer to the qplan? Seems the 8606 lumps it all together and would pro-rate even the conversion amount. I know you can’t send after-tax to the qplan, but am confused on how to accomplish this. thanks, -m



Submitted by [email protected] on Fri, 2016-09-09 13:51

I got it.  The trick is to reduce the basis by the RMD and convert that reduced basis amount, effectively making the RMD tax free as well.  Get less into the Roth but still works. – m

Submitted by Alan - IRA critic on Sat, 2016-09-10 00:47

  • Correct. Step 1 is to distribute 5,000. Step 2 is to convert the remaining basis (70,000), then Step 3 do the direct rollover of the IRA balance to the qualified plan. A mocked up 8606 can be completed to prove that this works and avoids pro rating. Steps 2 and 3 could also be reversed if there is any doubt that the qualified plan will accept the IRA rollover, as this is not a rollover IRA but a contributary IRA that is being rolled over.
  • Note that the client is likely still working and not subject to qualified plans RMDs, so could potentially defer plan RMDs for several years. And there will be no IRA RMDs, so when RMDs from the qualified plan balance finally begin, they will be larger and concentrated into fewer years, which will result in higher taxes later. The determinating factor in the future RMD amount is the size of the qualified plan.

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