KEEPING IRS HAPPY

Submitted by CARROLL WILLIAMS on Fri, 2017-01-20 03:41

What if a TIRA owner completes all their 2017 RMDs and then does their 2017 ROTH conversion, early in 2017. Then later in the year they desire to recharacterize all or part of their 2016 Roth conversion. This would create a need to do more 2017 RMDs after the 2017 ROTH. Is this permissible or should they forget about the recharacterization? Just wondered if this question has ever come up. Thanks



Submitted by Alan - IRA critic on Fri, 2017-01-20 16:50

  • Good question, and I have not seen this one before. The TIRA owner should still recharacterize if they want to. Technically it would create a failed 2017 conversion because the 2017 RMD is still considered completed but the portion of the 2017 conversion that has now become RMD money due to the recharacterization is an excess Roth contribution which needs to be removed with allocated earnings.
  • Another solution if the 2016 conversion is to be recharacterized is to recharacterize as much of the 2017 conversion as needed first. Then recharacterize 2016 and complete the rest of the 2017 RMD. Reconversion waiting requirements need to be considered, therefore the 2017 conversion recharacterization should be made to a new TIRA account, which could also receive the 2016 recharacterization. That would allow the reconversion for 2017 to be done.
  • That said, if the TIRA owner simply completes the additional RMD caused by the 2016 recharacterization, the IRS will be satisfied and there is a very slim chance that the other timing issues would be raised.

Submitted by CARROLL WILLIAMS on Sat, 2017-01-21 04:09

   I have a question on your second idea of recharacterizing enough of the 2017 ROTH to cover the additional 2017 RMD.  I believe that I learned on this site that the first amount out is the actual RMD (first in – last out rule) and thus the full 2017 conversion might need to be brought back.  However, could this be solved by making the first 2017 ROTH Conversion a small one and put into its own seperate account.  The larger 2017 conversion could follow and have its own account.  Then if the need arose for more 2017 RMDs, the small ROTH could be recharacterized (sacficed)  and satisfiy the (first in – last out rule).  Thankfully I am not facing this problem.  The question has been on my mind for a while and justed wondered how a person could properly solve such an issue.  What do you think Alan?

Submitted by [email protected] on Tue, 2017-01-24 22:37

Alan,We’ve been bending our brains around this one for a couple days now.  I think your first paragraph answer is what I would agree with – the 2017 conversion satisfies the 2016 based RMD amount, even when the 2016 conversion is recharacterized in 2017. (assuming the conversions were for enough to cover the revised RMD).  The question I have is the corrective action – you seem to indicate a recharacterization of 2017 conversion by “as much as needed” which I took to understand was an amount equal to the revised RMD delta.  I don’t think this works since you are now stuck with a 2017 conversion that is still including 2016 based RMD amounts.  Would seem you would have to recharacterize the whole 2017 conversion, then satisfy the additional RMD and then complete additional conversions as desired.  Would not a better solution be to simply remove from the 2017 conversion Roth IRA and amount equal to the “excess contribution plus earnings” attributed to the revised RMD amount?  Your third bullet says to just take out an additional amount as the revised RMD differrence, but this would violate the “ordering rules” wouldn’t it.  Wouldn’t this just be an additional distribution, still leaving the excess contribution in the Roth IRA? -m

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