Effect of Roth conversion/recharacterization on RMD?

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ddunca1944
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Joined: Fri Apr 01, 2011 1:49 pm

Effect of Roth conversion/recharacterization on RMD?

Post by ddunca1944 »

This year I converted $20,000 from my T-IRA to my R-IRA. I realize that next year, I'll have to recharacterize a part of that in order to stay within the 15% tax bracket. Next year is the first year that I will have to take my RMD from the T-IRA.

So if my T-"IRA balance is say, $500,000 on Dec 31, my RMD will be based on that, correct? So in Jan or Feb, I recharacterize - what effect, if any, will that have?
Alan S.
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by Alan S. »

The amount of the recharacterization transfer, which includes the earnings allocation for the conversion, must be added back to the actual year end TIRA balance in order to determine the current year RMD.

IRS Reg 1.408-8 Q&A 8(b) follows:
(b) Recharacterizations. If an amount
is contributed to a Roth IRA that is a
conversion contribution or failed conversion
contribution and that amount
(plus net income allocable to that
amount) is transferred to another IRA
(transferee IRA) in a subsequent year
as a recharacterized contribution, the
recharacterized contribution (plus allocable
net income) must be added to the
December 31 account balance of the
transferee IRA for the year in which
the conversion or failed conversion occurred.
Calm Man
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by Calm Man »

You to not HAVE to recharacterize it. Not that I am a fan of giving the government anything optional, it is not a tragedy if part of the conversion is at 25%. It will be a difference of 10% on maybe a few thousand dollars. So the annoyance of re characterizing might not be worth it.
Alan S.
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by Alan S. »

Determine how much gain or loss has been generated on your conversion. The higher the gain the more likely you would not recharacterize and increase your RMD as well as changing tax free gains into eventually taxable gains when distributed from the TIRA. If you have a loss, the more likely you would recharacterize to avoid paying taxes on phantom income.

There are other factors, such as whether you will have a better year to reconvert. The recharacterization option gives you a chance to consider again whether you think you marginal rate in retirement on average will be more or less than what you are paying for the conversion. But gains or losses factored into your current rate will alter the actual rate you are paying on the conversion based on the current value of that conversion.
dickenjb
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by dickenjb »

Went through this with my MIL. We did a $5K conversion, then realized she would have higher taxable income than expected. Recharacterized in 2014, it was $5050 going back in. RMD increased to reflect 12/31/2013 balance PLUS the $5050. Vanguard recalculated the RMD but only when we asked them to do so. Was 1 penny more than what I estimated.
pshonore
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by pshonore »

I had this same question so I'm bumping this thread to remind folks that if you re-characterize a Roth conversion in 2016 that you originally converted in 2015, you need to increase your 12/31/15 Traditional IRA balance by the amount re-characterized when figuring your RMD for 2016.

This means in theory you will not know your RMD amount until 10/15/16 unless you make the decision NOT to re-characterize prior to that date.
Alan S.
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by Alan S. »

And if your TIRA has basis, such a recharacterization may result in a change in the taxable portion of the RMD for the year you did the conversion.

The 12/31/2015 year end balance affects the 2016 RMD but if there is basis it also affects the 2015 taxable amount of the RMD or other distributions done in 2015. The reason is that the year end value of the IRA is increased by the amount that actually transfers back to the TIRA, not the amount you recharacterized. Losses or gains change the pro rate factor.

Example: You converted 50k with 10% basis, so taxable amount 45k. The 50k lost 20% so you recharacterized the 50k conversion but only 40k transferred back to the TIRA. Your year end value increased 40k so your 2016 RMD increased, but your 2015 RMD now has a slightly higher basis %, so a little less of it is taxable than before the recharacterization.
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Epsilon Delta
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Re: Effect of Roth conversion/recharacterization on RMD?

Post by Epsilon Delta »

I knew that "Linear optimization under constraints" course would come in useful someday.
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