RMDs

Submitted by Jeff Woodard on Sat, 2022-02-12 16:45

“The rules are very clear. RMDs can never be rolled over or converted. Further, the “first money out” rule says that the first funds distributed from an IRA in a calendar year when an RMD is due are considered the RMD. Because a conversion is a distribution and RMDs cannot be converted, the RMD must be taken prior to the conversion.”

But the law (or custodian)doesn’t actually prevent someone from transacting a conversion prior to taking a distribution, even if the person is of RMD age. It’s ultimately on the taxpayer to have know it shouldn’t have been done. But nonetheless, people have done conversions prior to taking distributions. Someone we know has done this exact thing already this year. And now he’s trying to figure out how to rectify it. Any thoughts?



Submitted by Alan - IRA critic on Sat, 2022-02-12 17:45

It would be helpful if custodians posted a warning such as ” the RMD for this account must be completed before converting from this account”. But of course then they might have to add that the RMD “for this account” can be completed by a distribution from another IRA account under the aggregation rules. Complications such as this discourage IRA custodians from issuing warnings because there always seems to exceptions to simple statements.
The fix for correcting this error is fairly simple, but is also a hassle to report on your 1040 because the fix requires not reporting the 1099R (includes the RMD and the conversion) as it was issued. The portion of the conversion which includes the RMD is applied to the RMD, but because a conversion is a rollover to Roth, and rolling over an RMD is not allowed, an excess contribution to the Roth is produced. This needs to be explained to the Roth custodian and the removal of the RMD amount with allocated earnings is required to fix the excess Roth contribution. 
Since this person is still within the 60 day rollover deadline, the amount distributed in excess of the RMD can be rolled back to the TIRA account. The question is whether they have distributed the correct amounts, but in the wrong order, or did not understand that they could not convert their RMD and therefore only withdrew the RMD amount including the conversion. Then all they need to do is remove the excess contribution from the Roth with no need for a rollover. 

Submitted by David Toberisky on Sun, 2022-02-13 13:38

Regarding the “first money out” rule that the first funds distributed from an IRA in a calendar year when an RMD is due are considered the RMD. This issue came up recently in a post about Roth conversions. Question: What about QCDs? If age 72 is reached in July, would a QCD in the first 6 months of the year count toward that year’s RMD? 

Submitted by David Mertz on Sun, 2022-02-13 14:03

Yes, anydistributions made during the year one reaches age 72 are RMD until the RMD for that IRA is satisfied, no matter when during the year the distribution occurs.  Other than the different tax treatment, a QCD is no different than any other regular distribution.

Submitted by David Toberisky on Sun, 2022-02-13 14:22

Thanks for your reply. So re the impact on the RMD for that year: If age 72 is reached in July and RMD is $xx but the QCD is taken anywhere from January to June, the RMD to take for that year is $xx – QCD? In other words, though the QCD was taken a few months before RMD age was actually reached, it still reduces the amount of money required to be pulled from the IRA? Thanks again.

Submitted by David Mertz on Sun, 2022-02-13 16:13

Correct.  The QCD in this case satisfied the first portion of the RMD.  It doens’t matter that ithe distribution occurred before actually reaching age 72 later in the year.

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