Roth Conversion and RMD
For my clients that we are doing Roth Conversions for we would like to convert early this year (now preferably).
However I am running into a problem with some clients who have to take RMDs this year. Custodian is saying that they must take the RMD first before converting amount to the Roth. They are citing Reg 1.408A-4 Q6 which does indeed state this.
I can understand this if we were converting the entire account, which we are not. These clients either take monthly IRA distributions or one withdrawal at end of the year to satisfy the RMD. I would hate to have to accelerate that if I do not have to.
Further the custodian does not know if the client has other IRA accounts with a different custodian which they may be using to satisfy the RMD.
The custodian has been inconsistent as some conversions we did in Jan and Feb for clients over 70 1/2 they have allowed to go through without first asking for RMD.
Am I stuck here or is there something we can do?
Thanks as always.
Howard
Permalink Submitted by mk foss on Mon, 2010-03-15 21:16
As you determined from your reading, the first amounts that come from an IRA are to meet the RMD. If your client had proof from another account that the RMD had been met, another custodian might accept that. However, the compliance departments of many of the custodians have set up rigid rules so that they don’t violate the Internal Revenue Code and they may be unable even if willing to budge. I think people converting in 2009 will have to settle for pro-rata RMDs from the accounts to be converted in order to make the conversion happen.
Permalink Submitted by ron dombcik on Tue, 2010-03-16 00:15
What if a partial conversion was done in 2009 when distributions were not required? Any rules on that?
Permalink Submitted by Alan Spross on Tue, 2010-03-16 00:22
2009 conversions were no problem in this respect since all RMDs for 2009 were waived.
But for 2010 or other years, the RMDs must be taken first and that may mean accelerating the date of the RMD or moving the conversion date back toward later in the year. If a conversion is done before the RMD is satisfied from any of the TIRA accounts, what you technically have is a completed RMD, then a regular contribution to the Roth IRA. You can correct this by recharacterizing the conversion or by taking a corrective distribution from the Roth IRA before the extended due date with earnings or taking a distribution after the extended due date without earnings. But the amount of the RMD must come out of the Roth IRA.
Permalink Submitted by Adam Bunday on Wed, 2010-03-17 03:10
Would most custodians require the RMD for someone who is just turning 70 1/2 this year and wants to convert their IRA to a Roth even though they are allowed to postpone their first RMD until April 1st of next year? My guess is that most custodians would still require the RMD first regardless of intent to postpone.
Thanks!
Adam
Permalink Submitted by Alan Spross on Wed, 2010-03-17 03:34
It is questionable if most custodians are aware of this rule, and in addition the RMD can be satisfied from any TIRA account and each custodian has no idea how many other IRA accounts you may have. Many of them will just let the conversion go through, and if that happens you are still deemed to have taken your RMD if you did not take it from another account earlier. The problem here is that by converting your RMD you have made an excess contribution to your Roth IRA and it must be corrected or it will start incurring 6% excise taxes every year.
The fact that the RBD is not until the following year does not affect the above because the first distribution taken IN an RMD year is considered allocated to the RMD. This means that the RMD must be distributed sooner or the conversion must be moved back. Since the conversion is usually much more than the RMD, it makes sense to move the RMD date up so you can do the conversion when you want to.