forgot to take rmd before converting IRA to roth
What happens when you convert an IRA to a Roth and the RMD was not taken out first? It is the only IRA the person owns and he is 75 years old,
What happens when you convert an IRA to a Roth and the RMD was not taken out first? It is the only IRA the person owns and he is 75 years old,
Permalink Submitted by Alan Spross on Thu, 2010-06-03 23:28
He would have to treat the RMD amount as an excess regular contribution to the Roth IRA, and have it distributed to him as adjusted for positive or negative earnings.
He would report the RMD (plus or minus earnings) as taxable income on line 15 of Form 1040. And he would report the converted amount on Form 8606 net of the amount of the RMD excess contribution. This should be explained to the Roth custodian so the 1099R is coded as a corrective distribution.
Permalink Submitted by Charles Csakai on Mon, 2010-09-13 15:35
Alan, in the above situation, would the earnings be considered as part of the RMD? Assuming client converted $15K and RMD is $20K. Client corrects the excess contribution, takes the $15K and $1K in earnings.
Client thinks he now has taken $16K of the $20K RMD; I’m thinking that only $15K has been taken toward the $20K.
Permalink Submitted by Alan Spross on Mon, 2010-09-13 19:44
You are correct. So far he has apparently converted the 15k, but still needs to withdraw another 5k to satisfy the total RMD of 20k.
The conversion is therefore treated as an excess regular Roth contribution and corrected accordingly. The 1k of earnings occurred in the Roth, but it would not change things had he rolled over the distribution to another TIRA. Either way, the corrective distribution is coded differently on the 1099R than a normal distribution, and the earnings are being distributed in conjunction with contributed funds which were not eligible for contribution (in this case rollover) to the account.
That’s the technical explanation. Conceptually, the RMD is generated based on the prior year end account value. These earnings are incurred after that valuation date due to contributions that should not be in the account because they are not rollover eligible. So you have totally separate distribution requirements based on totally different factors and one cannot be credited against the other. By the same token, if the excess contribution had LOST money, he would not have his RMD increased by the amount of the loss.
It IS a good question though, shows the client is thinking in considerable depth particularly if he is thinking that he needs only another 4k to bring line 15 of Form 1040 up to the 20k RMD. But line 15 actually now needs to show 20k plus any earnings for the rollover.
I doubt there is any IRS Reg that specifically and clearly states you cannot credit these earnings against the RMD, but If I find such a reference will post it here.
Permalink Submitted by Alan Spross on Thu, 2010-09-16 19:15
Charles,
Here is a copy of a section in the 2002 IRS RMD ruling that confirms my prior statement. See amounts NOT taken into account:
>>>>>>>>>>>>>>>>>
Q–11. Which amounts distributed
from an IRA are taken into account in
determining whether section 401(a)(9) is
satisfied?
A–11. (a) General rule. Except as
provided in paragraph (b) of this A–11,
all amounts distributed from an IRA are
taken into account in determining
whether section 401(a)(9) is satisfied,
regardless of whether the amount is
includible in income.
(b) Amounts not taken into account.
The following amounts are not taken
into account in determining whether the
required minimum amount with respect
to an IRA for a calendar year has been
distributed—
(1) Contributions returned pursuant to
section 408(d)(4), together with the
income allocable to these contributions;
(2) Contributions returned pursuant to
section 408(d)(5);
(3) Corrective distributions of excess
simplified employee pension
contributions under section (copy truncated here)
>>>>>>>>>>>>>>>
Permalink Submitted by Charles Csakai on Thu, 2010-09-16 20:13
Thanks, Alan. I appreciate the follow-up.