RMD

Submitted by Candy Irwin on Fri, 2016-02-19 16:30

Is my client required to take an RMD if the traditional IRA account had a zero balance on 12/31/14 and 12/31/15? We recharacterized a Roth to a traditional then converted it back to a Roth within 30 days in 2015. Their tax advisor said their tax software is looking for an RMD. The client was 72 on 1/1/15. Thanks so much!



Submitted by Alan - IRA critic on Fri, 2016-02-19 16:59

I assume this was a Roth conversion done at some point. Would need the date of the conversion and the date of the recharacterization as well as the client’s full DOB. Also the date of any separate RMDs the client actually took since RMDs began.  There may also be issues regarding doing the second conversion in an RMD year before the RMD was completed.

Submitted by Candy Irwin on Fri, 2016-02-19 17:39

Alan, Roth contribution made 05/22/2014 and again on  04/01/2015. both contributions were recharacterized plus earnings on 04/10/2015. Then converted back to the Roth on 05/07/2015. Income as too hign on 2014 tax retrun for Roth contribution. No RMD was ever taken. There was not a traditional IRA for the client when the Roth contributions began. DOB is 03/19/1942Thanks for you help!Candy

Submitted by Alan - IRA critic on Fri, 2016-02-19 21:12

  • This is a real can of worms. Sounds like these “contributions” were regular Roth contributions since client was too old for TIRA contributions. As such these Roth contributions could not be recharacterized as TIRA contributions without creating an excess TIRA contribution due to his age. These excess TIRA contributions were then converted to a Roth IRA, which would be a failed conversion. The conversion needs to be recharacterized, and then the excess contributions must be withdrawn from the TIRA. Client would owe a 6% excise tax for the 2014 contribution for both 2014 and 2015. The 2015 excess contribution can still be withdrawn without an excise tax, and this should be done first. Then the TIRA should be completely withdrawn. The recharacterization resulted in a deemed 12/31/2014 TIRA balance which would have required a 2015 RMD and this explains the tax program producing a small RMD amount for 2015. The tax advisor should process a 5329 requesting a waiver of the 50% RMD penalty using a reasonable cause that taxpayer recharacterized a Roth contribution in error, created an excess TIRA contribution and is closing his entire TIRA balance. IRS will probably waive the penalty.
  • I have never seen this fact pattern before and doubt that the tax advisor has either. It’s a complete mess.

Submitted by Candy Irwin on Fri, 2016-02-19 21:25

Alan,Thanks for your inforamtion. I did forget to mention that the client has no earnings but his spouse is much younger with earnings so it was originally done as a spousal IRA. I dont know if that would have any bearing on the situation or not.

Submitted by Alan - IRA critic on Fri, 2016-02-19 21:50

Client could make a spousal Roth contribution using spouse’s earnings but only if their joint modified AGI was not too high. The MAGI must have been too high otherwise that contribution would not have been recharacterized as a TIRA contribution. Client could not make a spousal TIRA contribution because of his age even using the income of the younger spouse. However, if HE had been the younger spouse he could have made a spousal contribution using the income of the older spouse. In other words, for spousal contributions the age requirements are based on the age of the spouse receiving the contribution, not the spouse with the income. Therefore, all this still leaves him with those excess contributions.

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