RMDs Before a Roth Conversion

Take-Away: An individual’s entire required minimum distribution (RMD) for the year must be taken from his/her traditional IRAs before any Roth IRA conversion can take place with his/her traditional IRAs.

Background: Perhaps coming as a surprise to many, the SECURE Act Final Regulations of July clarified that a required minimum distribution (RMD) must be taken before a traditional IRA can be converted to a Roth IRA. If an individual has multiple traditional IRAs, even if they are held at different IRA custodians, the individual’s aggregate IRA RMD for the year must be withdrawn before the individual can convert his/her traditional IRA to a Roth IRA. This ‘take-RMD-first’ rule also applies to a 60-day IRA rollover of an IRA balance. However, this ‘take-RMD-first’ rule does not include a participant’s RMDs from a qualified plan like a 401(k) account. The Final Regulation just reaffirms the rule we have periodically covered in the past, which is that RMDs can neither be converted nor rolled over by an IRA owner. Sequencing matters when it comes to Roth IRA conversions.

Example 1: Ruth, age 80, owns three traditional IRAs, which are spread over three different IRA custodians. The balances for Ruth’s IRAs are: #1- $100,000; #2 $300,000; and #3 $450,000. At age 80 Ruth’s Uniform Lifetime Table ‘divisor’ is 20.2, which means that the RMDs for each of Ruth’s three traditional IRAs are: #1 $4,951; #2 $14,852; and #3 $22,278. Accordingly, Ruth’s aggregate RMD for the year is $42,081. Ruth can split this RMD up any way that she chooses, but she must take the full $42,081 before the end of the calendar year. Ruth would like to do a Roth IRA conversion of her IRA #1. Ruth must take the entire $42,081 as her RMD for the year before she can proceed with the Roth IRA conversion of her IRA #1(or any of her other traditional IRAs.) Ruth cannot just take $4,951 from her IRA #1 and convert the balance of that IRA #1 to a Roth IRA. All $42,081 of the RMD must be taken by Ruth for the year before any part of her traditional IRA can be converted to a Roth IRA.

Example 2: Same facts as in Example 1. However, assume that Ruth completes her Roth IRA conversion of IRA #1 before she satisfies her entire $42,081 RMD for the calendar year. Whatever remains of Ruth’s RMD before her Roth IRA conversion will be treated as an excess contribution by Ruth to her Roth IRA, which excess must be removed to avoid the 6% excess contribution penalty. Consequently, if Ruth took only the $4,951 from her IRA #1 and she then did a $59,000 Roth conversion within the same IRA #1, she would have made an excess contribution to her Roth IRA of $37,130, which amount represents what Ruth had remaining in her total (aggregated) RMD for the year [$42,081 (RMD) less $4,951 (amount withdrawn)  = $37,130 (excess contribution to her Roth IRA.)

Conclusion: RMDs have always had to be taken before any Roth IRA conversion. The Final Regulations clarify that all an individual’s entire (or aggregate) RMD for the calendar year must be fully withdrawn from their traditional IRA(s) prior to making any Roth IRA conversion, not just the RMD that is associated with the traditional IRA that is to be converted to a Roth IRA. Sequencing matters.

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