Roth Conversion prior to taking RMD

Submitted by Michael A. Danchak on Thu, 2015-10-22 00:14

In the Feb.’15 issue on page two I read the following:

Failure to take an RMD before completing
a rollover or making a Roth IRA conversion can lead to
serious tax issues. For instance, the rolled over RMD
often becomes an excess contribution, subject to a 6%
penalty for each year it remains in the new account until it
is corrected.

A client of mine transferred stock to a Roth without taking the RMD. I questioned the broker of one of the larger firms who called their IRA Dept. who then called their Legal Dept. In the opinion of the Legal Dept. “as long as the RMD is taken the timing did not matter”. Am I misreading the above? Is there a code regulation I can give to their Legal Dept.?

Thanks.



Submitted by Alan - IRA critic on Thu, 2015-10-22 00:59

That’s faulty guidance from the broker’s legal Dept. The first distribution from an IRA in an RMD distribution year is deemed to apply to the RMD. RMDs cannot be rolled over, and a conversion is a distribution and rollover. Therefore, the distribution is applied to the RMD, but when converted it creates an excess contribution to the Roth IRA. If caught early on, it’s not that costly. Either the conversion can be recharacterized or a corrective distribution taken from the Roth IRA. If caught before the extended due date, the only consequence is that earnings on the excess will be taxable and taxpayer will have lost the conversion opportunity. If caught after the due date, then the 6% excise tax for excess Roth contributions is due for each year the excess remains in the Roth IRA.The following is from the RMD Regs 1.408-8 Q 4:

Q-4. What portion of a distribution from an IRA is not eligible for rollover because the amount is a required minimum distribution?A-4. The portion of a distribution that is a required minimum distribution from an IRA and thus not eligible for rollover is determined in the same manner as provided in A-7 of § 1.402(c)-2 for distributions from qualified plans. For example, if a minimum distribution is required under section 401(a)(9) for a calendar year, an amount distributed during a calendar year from an IRA is treated as a required minimum distribution under section 401(a)(9) to the extent that the total required minimum distribution for the year under section 401(a)(9) for that IRA has not been satisfied. This requirement may be satisfied by a distribution from the IRA or, as permitted under A-9 of this section, from another IRA.

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