Roth conversions after rmd has begun

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Gregorycook
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Roth conversions after rmd has begun

Post by Gregorycook »

Hi
I am several years into taking my RMDs from my IRA and Vanguard has calculated my RMD for 2021.I had planned on taking it at the end of Dec.I am also going to do a Roth conversion and was wondering if I must change the date of my RMD to occur before I do a Roth conversion.
Thanks all
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retiredjg
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Re: Roth conversions after rmd has begun

Post by retiredjg »

The RMD must happen before the Roth conversion.
RetiredCSProf
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Re: Roth conversions after rmd has begun

Post by RetiredCSProf »

Yes, you must satisfy your RMD for the year prior to taking any Roth conversion in the same year; however, you can continue to take QCDs or other withdrawals from your traditional or roll-over IRAs though to the end of the year.

For example, you can satisfy an RMD of $20K in August, convert $40K to Roth in September, then in December, you can still take a QCD of $2K and withdraw $8K. The withdrawals in December will not count toward the 2021 RMD but will lower the RMD for 2022.

An additional (non-RMD) withdrawal in December would be useful if you need to wait until December to estimate your taxes and want to pay the estimated taxes (meet safe harbor) through your IRA withdrawals.
Katietsu
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Re: Roth conversions after rmd has begun

Post by Katietsu »

The first money out is considered to be the RMD. So you are not allowed to convert and you do not get to treat it as a QCD.

Edit: Since the QCD can fulfill the RMD requirement, this is obviously wrong.
Last edited by Katietsu on Wed Aug 18, 2021 1:35 pm, edited 1 time in total.
user5027
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Re: Roth conversions after rmd has begun

Post by user5027 »

Katietsu wrote: Wed Aug 18, 2021 12:15 pm The first money out is considered to be the RMD. So you are not allowed to convert and you do not get to treat it as a QCD.
I believe it can be treated as a QCD...

https://www.fidelity.com/learning-cente ... the-basics
Katietsu
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Re: Roth conversions after rmd has begun

Post by Katietsu »

user5027 wrote: Wed Aug 18, 2021 1:25 pm
Katietsu wrote: Wed Aug 18, 2021 12:15 pm The first money out is considered to be the RMD. So you are not allowed to convert and you do not get to treat it as a QCD.
I believe it can be treated as a QCD...

https://www.fidelity.com/learning-cente ... the-basics
Edited. Written in too much haste.
RCL
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Re: Roth conversions after rmd has begun

Post by RCL »

But can't they be done the same day?
RetiredCSProf
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Re: Roth conversions after rmd has begun

Post by RetiredCSProf »

RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
sport
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Re: Roth conversions after rmd has begun

Post by sport »

RetiredCSProf wrote: Wed Aug 18, 2021 12:11 pm Yes, you must satisfy your RMD for the year prior to taking any Roth conversion in the same year; however, you can continue to take QCDs or other withdrawals from your traditional or roll-over IRAs though to the end of the year.

For example, you can satisfy an RMD of $20K in August, convert $40K to Roth in September, then in December, you can still take a QCD of $2K and withdraw $8K. The withdrawals in December will not count toward the 2021 RMD but will lower the RMD for 2022.

An additional (non-RMD) withdrawal in December would be useful if you need to wait until December to estimate your taxes and want to pay the estimated taxes (meet safe harbor) through your IRA withdrawals.
If you want to get the best tax advantage of QCDs, you should make those distributions as part of your RMD. RMDs are fully taxable as ordinary income. However, if part of the RMD is QCD's, that part is tax free. This may also save you on your state income taxes and any other taxes/fees that are determined by your AGI, such as IRMAA charges.

You can, of course, make QCDs after you have completed your RMD. However, you do not get the most tax benefit doing it that way.
NancyABQ
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Re: Roth conversions after rmd has begun

Post by NancyABQ »

RetiredCSProf wrote: Wed Aug 18, 2021 8:40 pm
RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
My Roth conversions at Schwab happen instantly. I should note that there doesn't seem to be an online way to do them -- I have to call and talk to a representative, which isn't a huge hassle for me so far. If it's an ETF/stock, then the conversion happens at whatever the share price is at the moment the rep hits the button to do it. If it's a Mutual Fund it uses the previous day's closing price. So I assume the timing is brokerage-dependent.
nalor511
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Re: Roth conversions after rmd has begun

Post by nalor511 »

NancyABQ wrote: Wed Aug 18, 2021 9:15 pm
RetiredCSProf wrote: Wed Aug 18, 2021 8:40 pm
RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
My Roth conversions at Schwab happen instantly. I should note that there doesn't seem to be an online way to do them -- I have to call and talk to a representative, which isn't a huge hassle for me so far. If it's an ETF/stock, then the conversion happens at whatever the share price is at the moment the rep hits the button to do it. If it's a Mutual Fund it uses the previous day's closing price. So I assume the timing is brokerage-dependent.
There's a Roth conversion button in my Schwab IRA that pops up if you try to go through doing a transfer from the IRA to the Roth, but I have not actually completed the conversion online. It appears to be there though, just a little hard to find
NancyABQ
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Re: Roth conversions after rmd has begun

Post by NancyABQ »

nalor511 wrote: Wed Aug 18, 2021 9:42 pm
NancyABQ wrote: Wed Aug 18, 2021 9:15 pm
RetiredCSProf wrote: Wed Aug 18, 2021 8:40 pm
RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
My Roth conversions at Schwab happen instantly. I should note that there doesn't seem to be an online way to do them -- I have to call and talk to a representative, which isn't a huge hassle for me so far. If it's an ETF/stock, then the conversion happens at whatever the share price is at the moment the rep hits the button to do it. If it's a Mutual Fund it uses the previous day's closing price. So I assume the timing is brokerage-dependent.
There's a Roth conversion button in my Schwab IRA that pops up if you try to go through doing a transfer from the IRA to the Roth, but I have not actually completed the conversion online. It appears to be there though, just a little hard to find
Huh, sure enough I just clicked through the menus and it does look like it would let me do a Roth Conversion myself. Though just for the record there was never a button specifically calling it a Roth conversion, though it was characterized that way in the summary screen once I put the numbers in (i.e. at the screen where I could have hit the confirmation button, but didn't).

Well, I will try it that way next time! When I did one by talking to the human a few years ago I asked "Is there really not a way for me to do this online?" and he said "No, you have to call us." So either he was wrong, or things have changed since then. I think the conversion is probably also instantaneous using this online option, but I won't know for sure until next time I try it.

Thanks for the pointer!
nalor511
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Re: Roth conversions after rmd has begun

Post by nalor511 »

NancyABQ wrote: Wed Aug 18, 2021 9:58 pm
nalor511 wrote: Wed Aug 18, 2021 9:42 pm
NancyABQ wrote: Wed Aug 18, 2021 9:15 pm
RetiredCSProf wrote: Wed Aug 18, 2021 8:40 pm
RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
My Roth conversions at Schwab happen instantly. I should note that there doesn't seem to be an online way to do them -- I have to call and talk to a representative, which isn't a huge hassle for me so far. If it's an ETF/stock, then the conversion happens at whatever the share price is at the moment the rep hits the button to do it. If it's a Mutual Fund it uses the previous day's closing price. So I assume the timing is brokerage-dependent.
There's a Roth conversion button in my Schwab IRA that pops up if you try to go through doing a transfer from the IRA to the Roth, but I have not actually completed the conversion online. It appears to be there though, just a little hard to find
Huh, sure enough I just clicked through the menus and it does look like it would let me do a Roth Conversion myself. Though just for the record there was never a button specifically calling it a Roth conversion, though it was characterized that way in the summary screen once I put the numbers in (i.e. at the screen where I could have hit the confirmation button, but didn't).

Well, I will try it that way next time! When I did one by talking to the human a few years ago I asked "Is there really not a way for me to do this online?" and he said "No, you have to call us." So either he was wrong, or things have changed since then. I think the conversion is probably also instantaneous using this online option, but I won't know for sure until next time I try it.

Thanks for the pointer!
You bet. I believe they most likely just don't know about it. It wouldn't make sense to train every rep on what options the customer does and doesn't have, just the ones the rep has
desconhecido
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Re: Roth conversions after rmd has begun

Post by desconhecido »

retiredjg wrote: Wed Aug 18, 2021 12:06 pm The RMD must happen before the Roth conversion.
Why?
[edit: I'm finding several financial planning websites which assert that RMDs must be the first distributions of the year, but haven't found an explanation of these assertions. Is there an IRS reference?]

Ok, I think I've found the answer: 26 CFR § 1.402(c)-2 (https://www.law.cornell.edu/cfr/text/26/1.402%28c%29-2)
Explanation that sort of makes sense to me: http://www.marottaonmoney.com/roth-conv ... out-first/

Looks as though the rule exists to prevent taxpayers from taking an apparently taxable distribution and subsequently rolling it over IAW the 60 day rule and also to make sure nobody does a taxable Roth conversion and tries to slip it into line 4b as an apparent satisfaction of the RMD requirement.

sorry about any misunderstanding.
sport
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Re: Roth conversions after rmd has begun

Post by sport »

You can also find the rules for IRA distributions in IRS Pub 590-B.
Alan S.
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Re: Roth conversions after rmd has begun

Post by Alan S. »

Yes, A-7 of the IRS Reg posted above is the regulation indicating that the first distribution in an RMD distribution year is deemed to apply to the RMD. But the IRS states it a little differently:
A-7: (a) General rule.
Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions.
However, the above deals with qualified plans that do not have the RMD aggregation rules of an IRA (although a 403b actually does). Therefore, IRS Reg 1.408-8 applying to IRAs restates the above, but adds "for that IRA" to the above, meaning that the above rule applies separately for each separate IRA account. This opens up the opportunity to partition your IRA into two accounts before year end to create one account with likely a small balance and therefore a small RMD with the intent to convert that entire small IRA before completing the RMD for the larger IRA much later in the year. Yes, this takes some planning and execution work, but if you really want to convert early in the year, take most of your RMD late in the year and perhaps withhold from the late year RMD, you can do it. You could also do a QCD as part of the late year RMD from the larger IRA.

Example: You have a 500,000 TIRA, and would like to convert 40,000 early in 2021. Your RMD is 5%.

Step 1: Partition your IRA by non reportable direct transfer to create a 45,000 separate IRA account. Do this before year end 2021.

Step 2: Your 2021 RMD is then 2,250 for the small IRA and 22,750 for the larger 455,000 IRA.
Step 3: Early 2022 you distribute your 2,250 RMD from the small IRA. Since the RMD for that IRA has been satisfied, you can then convert your 40,000 right away.
Step 4: Late in 2022, distribute the 22,750. Withhold if you wish or incorporate QCD if you wish.

Repeat each year. This moves funds to your Roth almost a year earlier than when the bulk of your RMD is distributed. One pitfall however is that you need to know early in the year how much you wish to convert and you probably do not know your taxable income accurately enough to top off your tax bracket with the conversion. To deal with that challenge you could do an early year conversion of the amount you are sure of and add the remainder of your conversion from the larger IRA after completing it's RMD.
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retiredjg
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Re: Roth conversions after rmd has begun

Post by retiredjg »

Well, that's an interesting twist Alan. And knowing the optimizing nature of some humans, I bet someone out there is doing this. :D
nalor511
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Re: Roth conversions after rmd has begun

Post by nalor511 »

NancyABQ wrote: Wed Aug 18, 2021 9:58 pm
nalor511 wrote: Wed Aug 18, 2021 9:42 pm
NancyABQ wrote: Wed Aug 18, 2021 9:15 pm
RetiredCSProf wrote: Wed Aug 18, 2021 8:40 pm
RCL wrote: Wed Aug 18, 2021 7:30 pm But can't they be done the same day?
A QCD and RMD can be done on the same day.

I doubt that an RMD and Roth conversion can be done on the same day.

My experience has been that the Roth conversion completes at the end of the trading day, whether the conversion is from a mutual fund or an ETF. For example, if I submit conversion of an ETF from my Fido IRA during the trading day, the conversion applies the closing price for the ETF, regardless of what time I submitted the Roth conversion.

I have taken RMDs only from mutual funds. I do not know if it is possible to transact and complete an RMD during the trading day to ensure having it complete before a Roth conversion on the same day.
My Roth conversions at Schwab happen instantly. I should note that there doesn't seem to be an online way to do them -- I have to call and talk to a representative, which isn't a huge hassle for me so far. If it's an ETF/stock, then the conversion happens at whatever the share price is at the moment the rep hits the button to do it. If it's a Mutual Fund it uses the previous day's closing price. So I assume the timing is brokerage-dependent.
There's a Roth conversion button in my Schwab IRA that pops up if you try to go through doing a transfer from the IRA to the Roth, but I have not actually completed the conversion online. It appears to be there though, just a little hard to find
Huh, sure enough I just clicked through the menus and it does look like it would let me do a Roth Conversion myself. Though just for the record there was never a button specifically calling it a Roth conversion, though it was characterized that way in the summary screen once I put the numbers in (i.e. at the screen where I could have hit the confirmation button, but didn't).

Well, I will try it that way next time! When I did one by talking to the human a few years ago I asked "Is there really not a way for me to do this online?" and he said "No, you have to call us." So either he was wrong, or things have changed since then. I think the conversion is probably also instantaneous using this online option, but I won't know for sure until next time I try it.

Thanks for the pointer!
Out of curiosity, has anyone Roth converted at Schwab after the market is closed? If it's instant (unlike VG who does it at market close like a regular MF order) maybe that works?
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Eagle33
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Re: Roth conversions after rmd has begun

Post by Eagle33 »

Alan S. wrote: Thu Aug 19, 2021 9:51 am Yes, A-7 of the IRS Reg posted above is the regulation indicating that the first distribution in an RMD distribution year is deemed to apply to the RMD. But the IRS states it a little differently:
A-7: (a) General rule.
Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions.
However, the above deals with qualified plans that do not have the RMD aggregation rules of an IRA (although a 403b actually does). Therefore, IRS Reg 1.408-8 applying to IRAs restates the above, but adds "for that IRA" to the above, meaning that the above rule applies separately for each separate IRA account. This opens up the opportunity to partition your IRA into two accounts before year end to create one account with likely a small balance and therefore a small RMD with the intent to convert that entire small IRA before completing the RMD for the larger IRA much later in the year. Yes, this takes some planning and execution work, but if you really want to convert early in the year, take most of your RMD late in the year and perhaps withhold from the late year RMD, you can do it. You could also do a QCD as part of the late year RMD from the larger IRA.

Example: You have a 500,000 TIRA, and would like to convert 40,000 early in 2021. Your RMD is 5%.

Step 1: Partition your IRA by non reportable direct transfer to create a 45,000 separate IRA account. Do this before year end 2021.

Step 2: Your 2021 RMD is then 2,250 for the small IRA and 22,750 for the larger 455,000 IRA.
Step 3: Early 2022 you distribute your 2,250 RMD from the small IRA. Since the RMD for that IRA has been satisfied, you can then convert your 40,000 right away.
Step 4: Late in 2022, distribute the 22,750. Withhold if you wish or incorporate QCD if you wish.

Repeat each year. This moves funds to your Roth almost a year earlier than when the bulk of your RMD is distributed. One pitfall however is that you need to know early in the year how much you wish to convert and you probably do not know your taxable income accurately enough to top off your tax bracket with the conversion. To deal with that challenge you could do an early year conversion of the amount you are sure of and add the remainder of your conversion from the larger IRA after completing it's RMD.
Should that be "...convert $40,000 early in 2022"?
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Goodbuys
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Re: Roth conversions after rmd has begun

Post by Goodbuys »

What a good post and with great detail. Thanks! I would like to use this multi-account IRA strategy in order to take RMD from a small IRA account and then convert the rest in that account to Roth IRA. Just wondering if others had tried this strategy. If yes, any tips? Most of the retirement representatives that I talked to are not aware of this strategy. Therefore, I would like to double check that it is working. Thanks.
Alan S. wrote: Thu Aug 19, 2021 9:51 am Yes, A-7 of the IRS Reg posted above is the regulation indicating that the first distribution in an RMD distribution year is deemed to apply to the RMD. But the IRS states it a little differently:
A-7: (a) General rule.
Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions.
However, the above deals with qualified plans that do not have the RMD aggregation rules of an IRA (although a 403b actually does). Therefore, IRS Reg 1.408-8 applying to IRAs restates the above, but adds "for that IRA" to the above, meaning that the above rule applies separately for each separate IRA account. This opens up the opportunity to partition your IRA into two accounts before year end to create one account with likely a small balance and therefore a small RMD with the intent to convert that entire small IRA before completing the RMD for the larger IRA much later in the year. Yes, this takes some planning and execution work, but if you really want to convert early in the year, take most of your RMD late in the year and perhaps withhold from the late year RMD, you can do it. You could also do a QCD as part of the late year RMD from the larger IRA.

Example: You have a 500,000 TIRA, and would like to convert 40,000 early in 2021. Your RMD is 5%.

Step 1: Partition your IRA by non reportable direct transfer to create a 45,000 separate IRA account. Do this before year end 2021.

Step 2: Your 2021 RMD is then 2,250 for the small IRA and 22,750 for the larger 455,000 IRA.
Step 3: Early 2022 you distribute your 2,250 RMD from the small IRA. Since the RMD for that IRA has been satisfied, you can then convert your 40,000 right away.
Step 4: Late in 2022, distribute the 22,750. Withhold if you wish or incorporate QCD if you wish.

Repeat each year. This moves funds to your Roth almost a year earlier than when the bulk of your RMD is distributed. One pitfall however is that you need to know early in the year how much you wish to convert and you probably do not know your taxable income accurately enough to top off your tax bracket with the conversion. To deal with that challenge you could do an early year conversion of the amount you are sure of and add the remainder of your conversion from the larger IRA after completing it's RMD.
Last edited by Goodbuys on Sat Nov 20, 2021 11:22 pm, edited 1 time in total.
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Peter Foley
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Re: Roth conversions after rmd has begun

Post by Peter Foley »

With respect to timing . . .

I will hit RMDs next year and plan to do QCD's for a good portion of it. I have a checking account set up for my IRA. My plan is to write checks to a couple charities.

Methinks I have to wait until the charities cash the checks before I can do a Roth conversion or other withdrawal. Is that correct? It certainly seems the safest approach.
sport
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Re: Roth conversions after rmd has begun

Post by sport »

That seems to be correct. When you write the checks, the money does not come out of your account until the check is cashed. The way to avoid the wait is to let the IRA custodian write the checks. Then the money comes out of your account immediately.
trueblueky
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Re: Roth conversions after rmd has begun

Post by trueblueky »

Curious how the IRS knows the order of these transactions:
QCD, RMD, Roth conversion
Pops1860
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Re: Roth conversions after rmd has begun

Post by Pops1860 »

Be careful. See below quote from a Fidelity website:
Funds must be transferred directly from your IRA custodian to the qualified charity. This is accomplished by requesting your IRA custodian issue a check from your IRA payable to the charity. You can then request that the check be mailed to the charity, or forward the check to the charity yourself.

Note: If a distribution check is made payable to you, the distribution would NOT qualify as a QCD and would be treated as taxable income.
I have seen this other places as well.

IF the client has a checkbook DIRECTLY related to the IRA account, he can write personal checks for QCDs. This is what a previous poster has said, but be careful, don't miss the fine point involved!

Simply taking an IRA distribution and then writing a personal check doesn't meet IRS requirements/rules.
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sport
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Re: Roth conversions after rmd has begun

Post by sport »

trueblueky wrote: Sun Nov 21, 2021 10:29 am Curious how the IRS knows the order of these transactions:
QCD, RMD, Roth conversion
They don't know. However, if they do an audit, the paper trail would show the order.
Lalamimi
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Re: Roth conversions after rmd has begun

Post by Lalamimi »

Husband will turn 72 Sept 2023. I will turn 70 end of Dec 2023 and start my Social Security (increase of over $2K a month over my current spousal). Thinking he should take his first RMD in Nov or Dec 2023 rather than taking two in 2024, so he is making Roth conversions until Dec 2022. Could he do a Roth conversion early in 2023 if taking the RMD in Dec? I will be in the same boat in 2025 - with one day left in the year to take my first RMD.
trueblueky
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Re: Roth conversions after rmd has begun

Post by trueblueky »

Lalamimi wrote: Sun Nov 21, 2021 3:41 pm Husband will turn 72 Sept 2023. I will turn 70 end of Dec 2023 and start my Social Security (increase of over $2K a month over my current spousal). Thinking he should take his first RMD in Nov or Dec 2023 rather than taking two in 2024, so he is making Roth conversions until Dec 2022. Could he do a Roth conversion early in 2023 if taking the RMD in Dec? I will be in the same boat in 2025 - with one day left in the year to take my first RMD.
It's the year you turn 72. Not the day.
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retiredjg
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Re: Roth conversions after rmd has begun

Post by retiredjg »

Lalamimi wrote: Sun Nov 21, 2021 3:41 pm Husband will turn 72 Sept 2023. I will turn 70 end of Dec 2023 and start my Social Security (increase of over $2K a month over my current spousal). Thinking he should take his first RMD in Nov or Dec 2023 rather than taking two in 2024, so he is making Roth conversions until Dec 2022. Could he do a Roth conversion early in 2023 if taking the RMD in Dec? I will be in the same boat in 2025 - with one day left in the year to take my first RMD.
If this RMD is from an IRA (not a 401k) and he only has one IRA, he cannot do a Roth conversion from that IRA early in 2023 and take the RMD from that IRA later in 2023. The first money coming out is deemed to be the RMD.

However, I guess this is what Alan's partition scheme mentioned above would work around. Too complicated for my weak brain. :happy
Lalamimi
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Re: Roth conversions after rmd has begun

Post by Lalamimi »

retiredjg wrote: Sun Nov 21, 2021 4:06 pm
Lalamimi wrote: Sun Nov 21, 2021 3:41 pm Husband will turn 72 Sept 2023. I will turn 70 end of Dec 2023 and start my Social Security (increase of over $2K a month over my current spousal). Thinking he should take his first RMD in Nov or Dec 2023 rather than taking two in 2024, so he is making Roth conversions until Dec 2022. Could he do a Roth conversion early in 2023 if taking the RMD in Dec? I will be in the same boat in 2025 - with one day left in the year to take my first RMD.
If this RMD is from an IRA (not a 401k) and he only has one IRA, he cannot do a Roth conversion from that IRA early in 2023 and take the RMD from that IRA later in 2023. The first money coming out is deemed to be the RMD.

However, I guess this is what Alan's partition scheme mentioned above would work around. Too complicated for my weak brain. :happy
Thank you! Alan's post got me to thinking! and thank you Trueblueky, I was not yet aware of that. So we can split our IRAs year before as per Alan's suggestion and should be fine. One more year to think it through.
krisSA
Posts: 12
Joined: Sat Dec 07, 2019 11:45 pm

Re: Roth conversions after rmd has begun

Post by krisSA »

Very informative post. Does one have to wait till he/she turn 72 (i.e. after birthday) or can take RMD earlier in that year from smaller IRA, to be able to do Roth conversion?
doobiedoo
Posts: 81
Joined: Fri Jul 23, 2021 1:10 pm
Location: Southern CA

Re: Roth conversions after rmd has begun

Post by doobiedoo »

Alan S. wrote: Thu Aug 19, 2021 9:51 am Yes, A-7 of the IRS Reg posted above is the regulation indicating that the first distribution in an RMD distribution year is deemed to apply to the RMD. But the IRS states it a little differently:
A-7: (a) General rule.
Except as provided in paragraphs (b) and (c) of this Q&A, if a minimum distribution is required for a calendar year, the amounts distributed during that calendar year are treated as required minimum distributions under section 401(a)(9), to the extent that the total required minimum distribution under section 401(a)(9) for the calendar year has not been satisfied. Accordingly, these amounts are not eligible rollover distributions.
However, the above deals with qualified plans that do not have the RMD aggregation rules of an IRA (although a 403b actually does). Therefore, IRS Reg 1.408-8 applying to IRAs restates the above, but adds "for that IRA" to the above, meaning that the above rule applies separately for each separate IRA account. This opens up the opportunity to partition your IRA into two accounts before year end to create one account with likely a small balance and therefore a small RMD with the intent to convert that entire small IRA before completing the RMD for the larger IRA much later in the year. Yes, this takes some planning and execution work, but if you really want to convert early in the year, take most of your RMD late in the year and perhaps withhold from the late year RMD, you can do it. You could also do a QCD as part of the late year RMD from the larger IRA.

Example: You have a 500,000 TIRA, and would like to convert 40,000 early in 2021. Your RMD is 5%.

Step 1: Partition your IRA by non reportable direct transfer to create a 45,000 separate IRA account. Do this before year end 2021.

Step 2: Your 2021 RMD is then 2,250 for the small IRA and 22,750 for the larger 455,000 IRA.
Step 3: Early 2022 you distribute your 2,250 RMD from the small IRA. Since the RMD for that IRA has been satisfied, you can then convert your 40,000 right away.
Step 4: Late in 2022, distribute the 22,750. Withhold if you wish or incorporate QCD if you wish.

Repeat each year. This moves funds to your Roth almost a year earlier than when the bulk of your RMD is distributed. One pitfall however is that you need to know early in the year how much you wish to convert and you probably do not know your taxable income accurately enough to top off your tax bracket with the conversion. To deal with that challenge you could do an early year conversion of the amount you are sure of and add the remainder of your conversion from the larger IRA after completing it's RMD.
Wow!! Very creative!
VanGar+Goyle
Posts: 171
Joined: Sat May 29, 2021 1:31 pm

Re: Roth conversions after rmd has begun

Post by VanGar+Goyle »

trueblueky wrote: Sun Nov 21, 2021 10:29 am Curious how the IRS knows the order of these transactions:
QCD, RMD, Roth conversion
I think that that is usually the best order.
QCD first, which can reduce your
RMD, then
Roth Conversion, then perhaps
additional distributions if needed.
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