Conversion of Nondeductible IRA to Roth Before Taking RMD
On January 31, 2010, my wife had a $54,000 rollover IRA and a $12,000 nondeductible IRA. She converted the $12,000 account to a Roth IRA on January 31, 2010. She turned 71 on July 22, 2009. She has not yet taken the RMD for any year. Regardless of the rule requiring RMD before a conversion, it is my assumption that she can take the 2010 RMD before April 1st based on the total of the two accounts as of December 31, 2009 on or before April 1, 2010 without incurring the penalty for not taking RMD [i]before[/i] the January 31, 2010 conversion date, and it is also my assumption that she does not have to combine a 2009 RMD with the 2010 RMD because of the 2009 suspension of RMDs. Are both of these assumptions correct?
John Epeneter
Permalink Submitted by Alan Spross on Sat, 2010-02-27 18:13
The second one is correct, but not the first.
While the 2009 RMD has been waived, the 2010 RMD remains. Since the first distribution in 2010 is deemed to be her RMD for 2010, she has converted it to a Roth IRA. The date of 4/1/2010 is immaterial, and would only have applied to her 2009 RMD had it not been waived, but she still should not have converted before taking that RMD.
This can be fixed fairly easily, but first I wanted to check to see if you realize that the conversion of the 12,000 account would not be tax free since the pro rate rules apply over both her IRAs. If you knew that about 9,800 of the 12,000 conversion is taxable, would you still want to retain that conversion?
Also, is the 12,000 figure her basis per Form 8606, or just the value of the account to which she made non deductible contributions?
Will get back to the corrective action needed, but wanted to resolve this other matter first. Please advise.
Permalink Submitted by John A Epeneter on Sat, 2010-02-27 19:06
Still want the conversion and $12,000 is the basis.
Permalink Submitted by Alan Spross on Sat, 2010-02-27 19:37
OK, then what she has here is a partially failed conversion to the extent of the 2010 RMD amount. These are treated as excess Roth REGULAR contributions.
If the conversion was 12,000 and the proper RMD 2,500 (estimated), then the Roth custodian should be asked to process a distribution coded as a return of regular contributions of 2,500. They will have to do an earnings calculation for the short period of time between the conversion and this corrective distribution. If the earnings are $20, they will distribute 2,520 to her. Only the earnings are taxable on line 15b of Form 1040 for the year 2010. She will still report the 12k conversion on the 2010 return as planned (either deferred to 2011 and 2012 or fully reported for 2010).
So there is no substantial cost to this. She will end up with 2,500 less in the Roth that should not have been there in the first place. If she wants more in the Roth, she can do a second conversion of any amount she chooses, eg 2,500 to make up for the amount pulled out of the Roth to make up the RMD.