Roth Conversion and RMD
I have a client with $2,000,000 in a deductible IRA account. He is 80 years old. Earlier this year he decided to convert $500,000 to a Roth IRA before he took his RMD for 2010. It is my understanding that a portion of this $500,000 must be removed and reclassified as his RMD. Is this correct? Do we really need to jump through these hoops as long as he takes the proper total RMD from his remaining IRA by year end? Why would the IRS care as at the end of the day they are going to get the same amount of tax off of this either way? The IRS wouldnt even know the timing of the conversion vs the RMD unless there was an audit of the client correct and under audit exactly what could the penalize for since in the end he paid everything that was due? Any feedback would be appreciated.
Permalink Submitted by Anonymous (not verified) on Tue, 2010-11-09 15:02
Here is a link to an earlier discussion about this. Note, the last question I posed to Alan:
http://www.irahelp.com/forum/viewtopic.php?f=1&t=5542
You are correct about the audit issue. The IRS would probably never find out, unless an audit is performed. Most of the IRA rules are “voluntary compliance”. I still would not take that risk unless it is your own money. I imagine the penalties involved would be related to an excess contribution. If the excess (RMD) amount is not removed by the deadline (Oct. 15 following the year) a 6% is assessed on the amount for every year it remains in the Roth – despite that the RMD was removed from the TIRA. But that would really be the extreme case and the IRS needs to find out…..
pko
Permalink Submitted by Alan Spross on Tue, 2010-11-09 19:08
Re why IRS should care………..because amounts that are not allowed to be in a Roth IRA have been contributed and will now generate tax free earnings instead of taxable earnings. In this case, the RMD is over 100k, so definitely not an incidental amount.
Permalink Submitted by Michael Gheen on Tue, 2010-11-09 19:13
End of the day the IRS is going to get taxes on the full RMD amount and the full conversion amount because the client will just gross up the conversion for whatever needs removed for RMD purposes.
Permalink Submitted by Alan Spross on Tue, 2010-11-09 19:33
This year they would, and every year that a conversion had to be grossed up to get the same dollars into the Roth. But after the entire TIRA has been converted, the IRS loses out since all the RMD amounts are in the Roth instead of in a taxable account. That includes the decades it would take for a non spouse beneficiary to take tax free RMDs from the inherited Roth.
Now if you take the RMD balance from another TIRA, at least the 8606 will not equal the 1099R, ie it will not be obvious that the entire distribution had been converted. But if the timing infraction is discovered at audit and he has to remove 100k of the original conversion it will double the amount that is lost to retirement account balances because of the RMD.