2020 RMD and Roth Conversion

Submitted by Brian Smith on Mon, 2020-04-27 14:21

Good morning.

In regard to the 2020 CARES Act, I’m am looking for clarification.

1. RMD was set up automatically on late March and early April, can a retired individual roll those funds back into Traditional IRA and avoid the taxes on the RMD? If so, do they put back the gross distribution amount?

2. Taking #1 above a step further, can that individual then do a Roth Conversion with the funds that went back into the IRA?

Thank you for your help in advance.

Regards,
Brian



Submitted by Alan - IRA critic on Mon, 2020-04-27 14:53

  • You can roll these distributions over, but subject to the one rollover limit. That means that you can only roll one of them back to a TIRA. The other one can only be rolled over to a Roth IRA (conversion), or if you were self employed and had a solo 401k, you could roll to the solo K. Conversions and rollovers to qualified plans are NOT counted against the one rollover rule. Of course, to even roll one distribution back to a TIRA, you cannot have rolled over any prior distribution taken in the last 12 months.
  • To be clear, if you want to convert, you already have the distributions, and would make a Roth conversion deposit with that money plus making up the withholding using your other money. You would not roll back to a TIRA even if you could.
  • If you want to convert one of them anyway, this works well. Roll one back to the TIRA and convert the other one to Roth. That conversion would be an indirect conversion where you deposit the distribution to your checking account, then write a check ( a gross check to replace the withheld amount) as a conversion deposit to your Roth IRA. 
  • Of course, both amounts can be converted if desired, and the rollover saved.

Submitted by Brian Smith on Mon, 2020-04-27 15:23

Thank you Alan that helps.  Retiree is fully retired and not working or accees to an employer retirement plan. To be clear if the retiree  wants to treat both distributions as a Roth Conversion, then they would neeed to add the taxes that were withheld on both distributions plus the net proceeds into a Roth?  There is not an option to convert the net proceeds from the distibution received into bank account into a Roth and treat those funds as roth conversion? I understand that only one rollover is allowed per 12 months and that retiree can’t do a rollover if they did one already within the last 12 months.  Thank you.   

Submitted by Alan - IRA critic on Mon, 2020-04-27 16:29

  • It is strictly optional to replace all or a portion of the withheld amounts with other funds. Some taxpayers may not have these funds available and in that case would report only the net amount converted on Form 8606, but would still be taxed on the gross distribution. This is usually not recommended due reduction of IRA balances, but many people do this paying taxes out of the TIRA that reduces the amount converted.
  • As for the one rollover limit in a 12 month period, this does not apply to Roth conversions. Therefore, those who cannot roll multiple distributions back to a TIRA might convert those other distributions that are going to be taxed anyway, as Roth accounts enjoy tax benefits over taxable accounts. 

Add new comment

Log in or register to post comments