Split RMD Between 2 Years as Retiree Turns 72?
Alan,
Background:
Retiree turns 72 in 2022.
At the end of 2021, he has the following qualified accounts:
401K: $500K
Rollover IRA #1: $850K
Rollover IRA #2: $50K
Can Retiree legally:
Option A
1.) Take the RMD from the smaller IRA in 2022, based upon its 12/31/21 $50K
2.) Perform a $75K direct (custodian to custodian) transfer from either the 401k or the larger IRA to the smaller one
3.) Then, convert the entire smaller IRA to a Roth IRA
4.) Delay the 2022 RMD for the larger IRA and 401k until the first quarter of 2023
[2022 tax liability on RMD from $50K account only; remaining liability shifted to 2023]
Option B
1.) Take the RMD for the 401k in 2022
2.) Perform Roth IRA conversions from the 401k
3.) Take the 2022 RMD for both IRA accounts in the first quarter of 2023.
[2022 tax liability on RMD from $500K 401k only; remaining liability shifted to 2023]
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-10 00:06
For Option A, you cannot do a direct rollover from the 401k without distributing the 401k RMD, therefore you would have to limit the additional funding of the smaller IRA to the non reportable transfer from the larger IRA. Option B is safer than A because you are not transferring balances to a different account to convert them as in A, but in B you are only converting from an account (401k) that has already distributed the RMD and did not roll any funds into the 401k.
Another way of looking at A v. B is that with B the conversions are done in the year after
Permalink Submitted by Undocumented Newcomer on Thu, 2022-03-10 03:06
Alan, In reading your reply and re-reading my question I realize that I may have been unclear. With either option, I plan to take the RMD and perform conversions in 2022 to achieve an income target just below the expected IRMAA threshold. The goal is to maximize the converted amount and minimize the RMD, arriving at the same taxable result. In the final line of either option, I was only identifying the 2022 taxed income on the RMD, ignoring the 2022 tax liablity from from the conversion. I apologize for the lack of clarity. Thank you.
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-10 03:57
I still think my response applies. Both plans use your marginal brackets for a combination of reduced RMDs in order to replace RMD income with conversion income, and in so doing it would push more RMD income into 2023 leaving little space for 2023 conversions. Option B would be totally within the IRS Regs, but A is more aggressive because it includes a balance non reportable IRA transfer which is then converted from the new account instead of from it’s original account.
Permalink Submitted by Undocumented Newcomer on Thu, 2022-03-10 11:05
I will take my 2022 401k RMD this year and begin taking IRA RMD (for both 2022 & 2023) in 2023. I am very grateful for your expertise.