Roth conversion satisfys RMD?
I believe that a Roth conversion does not satisfy an RMD. Is this correct? Why does the RMD have to be withdrawn before the Roth conversion can take place? We have some clients that satisfy their RMDs by taking a monthly distrib and are now considering on doing a partial Roth conversion. Are we required to end the monthly distrib & the client take the remaining 2010 RMD and then do the Roth conversion? What are our options?
Permalink Submitted by Alan Spross on Mon, 2010-02-01 22:06
Yes, the entire 2010 RMD must come out before converting. The technical reason for this is that the first dollars distributed in an RMD year are automatically deemed to be applied to the RMD. So the RMD will be satisfied either way. However, when the RMD is converted it creates an excess contribution to the Roth IRA since an RMD cannot be rolled over. This means that those subject to RMDs who also want to convert will have to move their RMDs up or move their conversion back in time, or some combination of both.
Actually, the fallout from doing the conversion first is not all that bad. Having converted the RMD, the fix would be to remove the RMD amount from the Roth using excess regular contribution rules, ie the amount plus or minus earnings must be taken out as a corrective distribution. The earnings will be taxed (even if the Roth is qualified), but there is no penalty since the Roth owner is over 59.5. This is really not so bad, except is is messy to report and would require that the IRS understand your explanatory statement.