workaround for rolling back 2009 multiple RMD distributions
In this months IRA newsletter Ed talks about clients who took multiple distributions from their IRA as part of their RMD and how they may be able to ge those multiple distributions back into their IRA if so desired after IRS Notice 2009-82.
My question concerns the strategy he talks about where taxpayer opens Roth IRA and then puts into the Roth total of all multiple distributions. Then, if the taxpayer cannot convert they may recharacterize those distributions.
For example Taxpayer A takes $5,000 a month distribution from IRA for 6 months before stoppng RMD. IRS then in Sept allows rollover to be put back.
According to the Nov newsletter Taxpayer could roll one of the $5,000 distribution directly back into their IRA by Nov 30.
Mechanically, how would the rest of the distributions, if taken and put into a Roth IRA as the newsletter suggests you may be able to do, avoid the one rollover per year rule ?
Ed mentions that this may or may not work since it is not mentioned directly in Notice 2009-82. What would the ramifications be in the event it does not work?
Thanks to everybody as usual
Howard
Permalink Submitted by Alan Spross on Wed, 2009-11-18 20:58
Howard,
Generally speaking, a Roth conversion with the intent to recharacterize it, is a work around to the one rollover limitation per IRA account. This works because a conversion does NOT count as a rollover for the limitation purposes. The rollover limitation is the reason that if RMDs or other distributions are taken periodically, only one such payment can be rolled back. The conversion and recharacterization of other payments received within 60 days allows additional distributions to be transferred back to the TIRA without counting as a rollover.
Still, this solution is limited in scope based on the frequency of distributions. Let’s take an example of RMD payouts on the 10th of each month. Since only those distributions taken in the last 60 days can be indirectly converted to a Roth IRA, the October and November RMDs can be converted to a Roth and then recharacterized back to the TIRA. However, 2009-82 only allows one distribution to be rolled back to the IRA because of the one rollover limit. Therefore, one of the earlier monthly distributions can also be rolled back to the IRA as the one allowed rollover. In total, 3 monthly distributions are restored to the traditional IRA. The other 8 distributions cannot be rolled back and are permanently distributed.
As you can see, even the Roth conversion work around is limited to those distributions within 60 days. It does not allow for going back further than that because those older distributions are no longer eligible for conversion.
There is no reason that the conversion strategy would not work if you kept within the above time limits. However, if any Roth conversion fails, it must be corrected with a corrective distributions under the excess contribution guidelines.
Permalink Submitted by Howard Hook on Thu, 2009-11-19 01:01
Alan,
Thanks as always.
So it sounds like in my example where the RMDs were taken monthly and then stopped June 30, 2009 I would only be able to either roll one month’s distribution back into an IRA or convert one month’s distribution to a Roth since the last distribution was taken more than sixty days ago?
Or can I roll one month’s distribution back into the regular IRA and convert one month’s distribution to a Roth (later recharacterizing back into the IRA)in effect enabling them to save the tax on two months distributions.
Howard
Permalink Submitted by Alan Spross on Thu, 2009-11-19 03:02
Yes, in your specific case here, since distributions were stopped over 60 days ago, the Roth conversion option is eliminated. Only one of the earlier distributions can be rolled back to the IRA, and that presumes that there was no prior rollovers within the last 12 months. 5 months of distributions must remain taxable as there is no option to get them back to the TIRA.
Permalink Submitted by Howard Hook on Thu, 2009-11-19 03:20
Alan,
Thank you for all your help.
Howard