Forgot to take RMD before converting to Roth
I have a propsect that converted an IRA to a Roth in January. They didn’t take their requiered minimum distribution before converting. Do they need to re-charicterize the RMD back to original IRA and take the RMD?
Because the whole IRA was converted and taxed, does this take care of the RMD?
Thoughts!!!!!!
Permalink Submitted by Alan - IRA critic on Mon, 2017-09-11 16:56
Because the entire account and not just the RMD amount was converted, the entire conversion would have to be recharacterized to correct the error by recharacterization and then taking out the RMD from the TIRA. That would work fine if the conversion had a loss and could be redone next year after the waiting period, but if the conversion has a decent gain there is a better solution. Tell the Roth custodian that the RMD amount of the conversion is an excess regular Roth contribution and is to be returned with allocated earnings. While the earnings will be taxable, the earnings on the rest of the conversion will remain in the Roth. If this latter method is used, client would report the RMD as a taxable distribution and only the rest of the conversion on Form 8606 as a conversion. Would also have to report the corrective distribution earnings as taxable. So line 15a would include the original conversion amount plus the total amount returned, and line 15b would indicate the taxable amount equal to the original distribution plus the earnings on the corrective distribution. If client has any other non Roth IRAs, please advise.
Permalink Submitted by Justin Whelan on Mon, 2017-09-11 17:15
Great advice. I realized if he has another non-Roth IRA he could take the RMD out of it and satisfy the requirement. thanks,
Permalink Submitted by Alan - IRA critic on Mon, 2017-09-11 17:25
The impact of another non Roth IRA is that the RMDs can be aggregated. However, the excess contribution for the converted accounts does NOT include the RMD for any other accounts, just the one converted. If he wanted to satisfy the total RMD from the other account, that would have to be done PRIOR to the conversion. While this can get complex, the tax code does allow an IRA owner that wants to do a large conversion early in the year, but postpone most of the RMD to partition the IRA into two accounts, one large enough to fund the conversion desired plus the RMD for that account only. The other account could delay it’s RMD up to year end.