Convert in 2010 AND avoid RMD?
Perhaps you can help me with a question related to a client of mine.
Can you think of a strategy for an IRA owner, currently in RMD but waived in 2009, to convert to a Roth under 2010 rules AND avoid triggering an RMD in 2010?
In other words, if our paperwork requested a conversion effective for January 1st, 2010 do we still have an RMD for 2010 because we had an IRA balance on 12/31/2009?
Do have a solution?
Thanks
Permalink Submitted by Edward Czapor on Wed, 2009-12-09 21:03
You cannot avoid an RMD for 2010 unless the waiver is extended, which appears unlikely. The RMD will have to be taken PRIOR to a conversion distribution. This will require some compromise, since a conversion early in the year and an RMD late in the year is generally desired.
Permalink Submitted by Alan Spross on Wed, 2009-12-09 21:05
There is no easy solution to this other than to have no traditional IRA balance as of 12/31/2009 under special rules for this purpose. This is described under “outstanding rollovers and recharacterizations” on p 35 of Pub 590.
For example, if 100,000 was removed from a TIRA on 12/30 and rolled over to another TIRA within 60 days, it would not be in any account on 12/31 and would have to be added back to the 12/31 year end balance. Same thing if you did a Roth conversion on 12/30 and recharacterized it several months later back to the TIRA. The amount recharacterized adjusted for earnings would have to be added to the 12/31 balance. Finally, if an amount was withdrawn in early December to do an indirect Roth conversion within 60 days, that amount would have to be added to the year end balance because it was not in any IRA as of 12/31.
A taxpayer subject to RMDs in 2010 must take out the RMD prior to doing the Roth conversion. Since the Roth conversion is typically much larger than the RMD, it would be logical to move the RMD date forward instead of moving the conversion date backward. The RMD itself cannot be converted. If the 2010 RMD is taken and then a large 2010 conversion is done, the 2011 RMD will be substantially reduced even though taxes on the conversion are not due for two more years. You get tax deferral on the conversion and RMDs are reduced for all future years starting with 2011 as a result of the conversion.
If the taxpayer is eligible, they could do a 2009 conversion in which the Roth was funded in 2009, and that would reduce the 2010 RMD because the funds were in the Roth by year end. Of course, if that conversion were recharacterized, the year end TIRA balance would be increased by the amount of the recharacterization.
That said, there IS a solution that is not easy. If a taxpayer is still working and the current employer plan will accept IRA rollovers, the IRA could be rolled over to the employer plan prior to year end. The TIRA balance as of year end would be 0. And if the employer plan allows in service distributions because of the employee’s age, the employee could then do a direct Roth conversion from the plan to a Roth IRA. There would be no RMD due for most plans since the employee is still working, but the employee would have to continue working into 2011 for this to work.
After all this, the client will probably figure that the RMD is not large enough to worry about. For those in their early 70s, it is just a little less than or more than 4% of the year end balance.
Permalink Submitted by charles lore on Sat, 2009-12-12 16:46
Alan regarding your solution at the end… wouldnt the rollover to QP get caught in the “outstanding rollovers and characterizations” trap the irs has set..
Permalink Submitted by Alan Spross on Sat, 2009-12-12 19:15
No, because the instructions for both lines 6 and 7 of Form 8606 state that rollovers to qualified plans should not be included in either line. Line 6 notes show,
“Do not include a rollover from a traditional or SEP IRA to a qualified employer plan even if it was an outstanding rollover.” Line 7 lists “distributions you rolled over to a qualified employer plan” on the items NOT to be included. Therefore, the money does not even have to even be credited to the employer plan as of 12/31 and can still be excluded.
It will be interesting to see how much demand spikes for IRA rollovers to employer plans due to the 2010 conversions, but plan benefits people better become familiar with plan rules regarding which types of IRA assets they will accept, if any.
One poster planned to roll the pre tax IRA balance into the employer plan, convert the remaining IRA basis tax free, and wondered how soon they could transfer the employer plan balance back to the IRA. Some employer plans may offer in service distributions from incoming rollovers, but not from funds coming from their own plan.