DQOTD: RMDs before Roth Conversion Rules?

[SecondCor521]

Exactly. As I said in the first post, make QCDs first so you can get the full tax benefit of having done so. Otherwise, you risk losing some of that to the first dollar rule if the total goes over the calculated RMD for the year.

I'm pretty sure the first dollar rule, as I've said elsewhere, appears to apply only to Roth conversions, not QCDs.

(ETA: And maybe not in the way people think; see next post.)

 

[SecondCor521]

Anyway, although we're talking about ordering of RMDs and QCDs, here is a link to a BH post where they talk about the ordering of RMDs and Roth conversions, which is a similar but distinct topic:

https://www.bogleheads.org/forum/viewtopic.php?p=7222461#p7222461

It's possible that the link there points to some stuff which might shed light on the ordering of RMDs and QCDs. I haven't looked.

I took a closer look, and there is a link in the above link that appears to point to the CFR where the poster thinks this ordering rule comes from - question 7 in particular.

I've read that question, and I'm not convinced it says what people purport it to say.

What it seems to me to be saying is that if you have a $60K RMD, and you do a $55K ordinary distribution and a $10K Roth conversion during the year, then the first $5K of the $10K Roth conversion is not eligible for conversion. There are consequences to that, of course.

But if you make a $30K ordinary distribution, then a $10K Roth conversion, then another $30K ordinary distribution, then the Roth conversion is totally fine, even if it happened before the full distribution was made.

In other words, the conflict only arises if you don't meet your RMD in full during a given year. I think the first dollar rule is to give the IRS a regulation to enforce what happens in that scenario if a Roth conversion also happened - they don't want to have to take ordering of transactions during the year into account. And this makes sense because the IRS doesn't get all of the transactions during the year; they just get the year end totals. With the first dollar rule, they can enforce things with just those totals.

It all turns on whether you think:

"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"

Does "has not been satisfied" mean at the time of the distribution, or at the close of the taxable year? The language is not dispositive in my opinion.

 

[Midpack]

OK, I’m totally confused now. It is disappointing this isn’t clearly stated somewhere, and I have looked at IRS 590-A, 590-B, 26 CFR § 1.402(c)-2, several TurboTax Q&A’s and other miscellaneous search links. All I find is several articles like this that insist on a correct order https://www.marottaonmoney.com/roth-conversion-take-your-required-minimum-distribution-out-first/

Maybe it’s not clearly stated because it’s not actually true. It’s suggested to avoid confusion between RMDs, rollover/conversions, QCD to avoid the church steeple situation among others. It hadn’t dawned on me the order mattered at all, hence starting this thread.

 

[twobits]

It all turns on whether you think:

"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"

Does "has not been satisfied" mean at the time of the distribution, or at the close of the taxable year? The language is not dispositive in my opinion.

That answer ends in "Accordingly, these amounts are not eligible rollover distributions."

I take that to mean that any distributions taken before the RMD is satisfied are not eligible for rollover. It doesn't mention Roth conversions, though, and I consider them to be very different from rollovers.

The article Midpack linked to states the IRS views a Roth conversion through their IRA Rollover rules, but there is no citation for that and I haven't seen anything corroborating that.

Why would they view a conversion, which you are paying taxes on, to a rollover, which you aren't? Maybe to limit us taking advantage of the Roth tax benefits?

 

[SecondCor521]

That answer ends in "Accordingly, these amounts are not eligible rollover distributions."

I take that to mean that any distributions taken before the RMD is satisfied are not eligible for rollover.

Yes, it does say that. But does it say that because the RMD wasn't satisfied at the time of the conversion, or the RMD wasn't satisfied for the year? I think the answer can be read both ways but the latter way (the way we want it to read) requires fewer assumptions.

The way you're suggesting seems to be reading something that isn't stated explicitly. The IRS could have written the CFR to say "has been satisfied at the time of the distribution" but they didn't, and the lack of specificity allows the "order free" reading in my view.

(There could be other language elsewhere in the law or rules which says it more definitively.)

It doesn't mention Roth conversions, though, and I consider them to be very different from rollovers.

The article Midpack linked to states the IRS views a Roth conversion through their IRA Rollover rules, but there is no citation for that and I haven't seen anything corroborating that.

Why would they view a conversion, which you are paying taxes on, to a rollover, which you aren't? Maybe to limit us taking advantage of the Roth tax benefits?

Roth conversions are, in IRS lingo, rollovers from a traditional IRA to a Roth IRA. For "sorta" corroboration, you can read the first paragraph on page 28 of Pub 590-A where the IRS freely mixes the terms:

"Converting From Any Traditional IRA Into a Roth IRA
Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a “conversion contribution.” If properly (and timely) rolled over, the 10% additional tax on early distributions won’t apply. However, a part or all of the distribution from your traditional IRA may be included in gross income and subjected to ordinary income tax.
You must roll over into the Roth IRA the same property you received from the traditional IRA. You can roll over part of the withdrawal into a Roth IRA and keep the rest of it."

(https://www.irs.gov/pub/irs-pdf/p590a.pdf)