ROTH CONVERSION A FEW MONTHS BEFORE REACHING 72

Submitted by David Toberisky on Thu, 2022-07-28 12:35

I’ll turn 72 midway into 2023, and I’m looking to clarify the situation with a Roth conversion in the months before actually hitting that birthday. Ed’s new book addresses this issue on pg 238: “Until you’ve satisfied your RMD, all money withdrawn in your 72nd year up to that amount will not be eligible for conversion.” I guess I need to understand what the IRS considers “72nd year.” If I did a conversion in January or February of 2023 but won’t hit 72 until 5 or 6 months later, is that NOT considered a conversion? Or is it OK as a conversion because I’m still 71 at that time? If fund/ETF prices haven’t recovered, or have dropped even further, after 1/1/23, it may be worthwhile to convert during those early months. Thanks for any advice on this!



Submitted by David Mertz on Thu, 2022-07-28 12:51

  • Any Roth conversion performed anytime in 2023 before completing your 2023 RMD for the IRA from which the conversion is being done would be a failed conversion.  The fact that you will not have actually reached age 72 prior to the conversion distribution from the traditional IRA would not make the conversion permissible.
  • To convert early in 2023 you would also have to complete your RMD early in 2023 before doing the conversion.  To offset the possibility that taking the RMD early in 2023 might mean taking the RMD in a down market you could take your RMD in-kind or reinvest a cash RMD distribution similarly outside the IRA.  This would have a potential benefit of having subsequent gains outside the IRA being taxable at long-term capital gains rates instead of as ordinary income had the gains occurred in the IRA. 

Submitted by ssel on Fri, 2022-07-29 00:04

I learned from Alan that this requirement to take RMDs before other distributions applies to each IRA account individually.  So would this strategy work?

  • Move $100 to a new IRA account at the end of 2022.
  • Take your RMD from this one account — a few dollars — at the beginning of January 2023.
  • Move an arbitrary amount from another IRA account (where no RMD has yet been taken) to this new account.
  • Convert this arbitrary amount to Roth.

 It would be strange if the restriction on RMDs is so easily circumvented, but from what I’ve read it can be. 

Submitted by Alan - IRA critic on Fri, 2022-07-29 04:02

  • Use of these intra year transfers does not violate the IRS Regs, but they take the basic strategy an extra step by using intra year transfers to alter the RMD order in the current year rather than to establish the balances at the end of the prior year to manage the RMDs for the following year. These current year transfers allow the amount to be converted to be transferred from an account for which the RMD has not been completed to a small balance account for which the completed RMD is minimal.  If the IRS ever recognized what was being done, they would probably not be happy. If enough taxpayers used this method, the IRS might revise the Reg that allows this (1.408-8, QA 4). 
  • The original version of this strategy involved partitioning the IRA balances in the prior year in a way that the RMD to be taken first included an account with the amount to be converted already in the account and that would make the RMD for that account larger than the intra year transfer method. The transfer of the converted amount to the account that already had the small RMD completed would constitute a step transaction allowing that amount to be converted prior to the RMD for the source account of the transfer. Basically, using the intra year transfers just increases the transactions necessary to front load the conversions and delay more of the RMD.

Submitted by David Toberisky on Fri, 2022-07-29 12:08

The commentary above about RMDs and separate IRA accounts is something I hadn’t heard before. I have long had two IRAs at different brokerages that are constituted somewhat differently. IRA A has about 30% of total deferred assets: IRA B 70%. I know roughly what my RMD for 2023 will be (assuming passage of SECURE 2.0 raising age to 73 will not happen, at least this year), but I haven’t give much thought to how the RMD would be divided between the two accounts. In fact, I was assuming that as long as the total RMD was satisfied based on the total IRA assets at year-end 2022, I could take the RMD from just one of the IRAs if I wanted. Is that not true? Meanwhile, could I do a conversion before my 72nd birthday from the smaller IRA A and then take the entire RMD from IRA B after the birthday? Would that satisfy the apparent IRS rules?

Submitted by David Mertz on Fri, 2022-07-29 13:46

ssel, I think that CFR 1.401(a)(9)-8 Q&A-8 precludes the strategy involving a transfer to an account for which the RMD had originally already been completed.  Based on CFR 1.401(a)(9)-8 Q&A-8, I believe that the RMD for the amount transferred must be satisfied with respect to the transferee account before any remaining amount is permitted to be converted to Roth from the transferee account.

Submitted by David Toberisky on Fri, 2022-07-29 15:08

In my case there is no transfer of IRAs. The two IRA thats I have are long-standing accounts (the larger one was a rollover from a 401k 7 years ago, for instance). So unless I’m not understanding the comment about CFR1.401(A)(B), it would not apply to my situation, but correct me if I’m wrong. Thanks.

Submitted by Alan - IRA critic on Fri, 2022-07-29 15:36

Once you are in an RMD distribution year, transactions done before or after your birthday have the same effect. You cannot convert from an IRA until the RMD for that IRA has been completed. However, if a distribution from a different IRA is large enough to satisfy the RMD for both IRAs, and is done before the conversion, you can convert from the IRA with no prior distribution taken from that particular IRA. Or you can complete the RMD for the smaller IRA, then convert an additional amount from that smaller IRA, before completing the RMD for the larger  IRA account. Again, these transactions can be done either before or after your actual birthday. Doing the non reportable transfers is not necessary for this strategy to work as you already have a small and large IRA account. A transfer done in the prior year could make your small IRA smaller, and therefore reduce the RMD for that small IRA before you convert from it, but it is certainly not necessary when you already have a 30-70 split. 

Submitted by David Toberisky on Fri, 2022-07-29 15:45

Thanks, Alan. That is really helpful.

Submitted by David Toberisky on Mon, 2022-08-01 14:29

The replies to my original query have been incredibly helpful, but I’d like to add something to it. Another thread on this forum discussed QCDs from different IRAs, and I’ve also thought about doing a QCD next year (not currently interested in one this year for various reasons). So, again, IRA A has about 30% of all IRA assets; IRA B 70%. So say the RMD for IRA A is $15,000. If I were to do a QCD for $5000 from that IRA and then take the remaining $10,000 RMD from same, then a conversion from from that IRA to Roth is legit, correct? And then I would move on to IRA B and finish my RMD for the year. Thanks!

Submitted by Alan - IRA critic on Mon, 2022-08-01 14:52

Yes, that’s correct. You will have finished your QCDs before completing your total RMD and you would have completed your RMD for IRA 1 before executing a conversion from that account. You could also do the RMD and conversion from A, then the QCD and remainder of the RMD from B;

Submitted by David Toberisky on Mon, 2022-08-01 17:49

Alan–Much appreciated!

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