Recharacterization effect on RMD
Taxpayer over 70 1/2 converted TIRA to ROTH in 2010 so had no TIRA balance at 12/31/10
Taxpayer now recharacterizes ROTH IRA back to TIRA in August 2011
Is it correct that taxpayer have a 2011 RMD calculated on the ROTH IRA balance on 12/31/10?
Thanks
Permalink Submitted by Alan Spross on Thu, 2011-08-18 19:33
Yes, that is correct.
If the conversion had been done to an existing Roth IRA, then the applicable year end amount for RMD purposes would be calculated as if the recharacterization back to the TIRA would have been done on 12/31. This means that gains or losses that occurred AFTER 12/31 of the conversion year would not affect the 12/31 account value for RMD calculations.
If any year this taxpayer does a conversion or a reconversion following recharacterization, the RMD for that year must be taken out before doing such conversion.
Permalink Submitted by Alan Spross on Fri, 2011-08-26 21:42
RETRACTION:
After looking at the IRS Regs in a different manner, the above answer is incorrect even though it was the most equitable answer. The explanation is as below, copied from another response made today. Sorry for the confusion:
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Good question and this should be surfacing quite often now given the huge number of 2010 conversions done, many of which are now in red ink.
The IRS Regs refer to adding back the balance for recharacterizations and outstanding rollovers. The rollover part is easy to value because it will always be the dollar amount that was distributed. Not so for recharacterized regular or conversion contributions to a Roth IRA, both of which accrue earnings or losses when the funds are in the Roth account. Since the IRS Regs refer to the earnings, the question is whether those earnings need to be valued as of 12/31 or just at the time the recharacterization is completed as reflected on the 1099R for the recharacterization. I would guess that the the IRS would expect to go by the 1099R, even though it can produce a figure far different than what the 12/31 value would have been.
Take for example, a 2010 conversion done late last year for 100,000. The market rose toward year end and that converted amount may have reached 110,000 had it never left the TIRA. But recent market volatility may have dropped the value of that conversion to 85,000 and not wanting to pay taxes on a phantom value of 100,000, the taxpayer recharacterizes and will get a 1099R next January showing 85,000 recharacterized. I would base the additional 2011 RMD on an added value of 85,000 for the TIRA of 85,000, not 100,000. Similarly, if the taxpayer recharacterized at the time of a gain (positive earnings), then the RMD should also be based on the added value instead of the amount converted.
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