2020 RMD Conversion

Submitted by Alan Durfee on Fri, 2020-05-01 19:57

Situation is:

1) Retired – not employed

2) One non-Roth IRA

3) I Use end of year IRA withdrawal to satisfy not only current year RMD,
but also as a substitute for estimated taxes for current year.

4) Under new guidelines, can I withdraw excess to RMD amount and convert that excess to Roth?
All tax free. If so, is there a limit to free conversion amount?

Note: I have been donating a portion of each RMD direct to charities, thereby saving some in taxes.
Will this pose issues associated with item 4 above?

thank you

AlanD



Submitted by Alan - IRA critic on Fri, 2020-05-01 20:21

Since there is no RMD for 2020, you can convert without regard to completing your RMD first. You can convert any amount you wish, either less than or more than what your RMD would have been. You can also do a QCD if you wish and are 70.5. The QCD will be non taxable as before, but since there is no RMD to offset it will not reduce your 2020 taxes. Finally, you might have to pay quarterly estimates, or with most custodian you could take a distribution and up to 99% withheld for taxes late in the year, but this distribution would be taxable in addition to any conversions. Note that due to no RMDs in 2020, you can take these distributions in any order you wish because it was the RMD that you were required to complete first in any year with RMDs due.

Submitted by Alan Durfee on Sat, 2020-05-02 16:25

I obviously misinterpreted what I had read, since I thought that ANY amount converted would be tax free in 2020.Further reading makes that assumption appear much probable, in that it seems that all the discussion is about the benefitsof converting now, since IRA values are down, and therefore less taxes would be due on the converted funds.PLEASE straighten me out.thank youAlanD

Submitted by Alan - IRA critic on Sat, 2020-05-02 20:13

Those discussions addressed the ability to convert without the added RMD income in 2020, the securities prices had fallen, and that future gains would be in the Roth IRA instead of the TIRA. In addition, a 2020 conversion will reduce the account balance in the future in the same way an RMD would, so would reduce future RMDs.

Submitted by Alan Durfee on Sat, 2020-05-02 21:18

Sorry, but I am not getting what it is I am trying to understand.Example:  I take my RMD each year Plus I take a single withdrawal as needed to satisfy my estimated taxes for current year.SO:1st question: In 2020, if I take RMD, must it then be converted to Roth?Second question: when converting to Roth, how are bonds, equities treated?  Must they be converted to cash first?Third question:  in 2020, can any additional funds, in excess of RMD, be withdrawn, be converted to Roth, and not become taxable income? 

Submitted by Alan - IRA critic on Sat, 2020-05-02 21:52

  • In RMD years, any amount that is withheld is part of the RMD.  Therefore, if paying your taxes with withholding rather than quarterly estimates, you might simply specify a withholding amount from your RMD distribution, and this distribution would take care of both your RMD and withholding.
  • Q 1 – Again, in 2020 there is no RMD to take. But you can still take a distribution if you need the money or if you want to convert to Roth. These distributions can be for any amount since only an RMD must be a specific amount. You never have to convert to Roth, that is entirely voluntary. In short, you do not have to take ANY distribution in 2020, but you can if you want to, including conversions. You could also withhold from a conversion distribution if you wanted to, eg. distribute 25,000 with 5000 withholding and the other 20,000 transferred to your Roth IRA. 
  • A conversion is usually done in cash, but you can also do an “in kind” conversion where a specific security is transferred straight to your Roth IRA. The custodian determines the market value of the security when the transfer is made (usually overnight), and that value shows on your 1099R as the gross amount of the conversion. It’s difficult to control the exact amount of the conversion when you transfer shares instead of cash, but it can be done. You can also do this with any distribution going to your taxable brokerage account such as an RMD. The value of the share when transferred then becomes your cost basis in the taxable account for eventually determining cap gains taxes when you sell the shares.
  • 3rd question – Any distribution, whether RMD or not, is taxable except to the extent you have basis in your IRA (reported on Form 8606). There is nothing in the CARES Act that makes a distribution not taxable, but the waiver of the 2020 RMD makes it possible NOT to take any distribution and therefore to avoid a tax bill for 2020.  Any conversion you do will be taxable, but these are entirely voluntary. The opportunity in 2020 is that if you are normally subject to RMDs, and now the RMD is waived, you can convert without having a taxable RMD in addition to your taxable conversion.

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