Do Your RMD Before Your RIC

Do Your RMD Before Your RIC

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I’m not a big fan of acronyms because there’s way too many of them and it’s easy to get confused by them, however, my original title for this post, “Don’t Forget to Take Your Required Minimum Distribution (“RMD”) Before You Do Your Roth IRA Conversion (“RIC”)” was way too long. So, for my fellow non-acronym fans (otherwise known as “NAF’s”), please bear with me on this one.

With the one-year suspension of required minimum distributions (“RMD’s”) in 2009, it’s easy to forget that if you’re at least 70-1/2 years old, you must start, or resume, taking mandatory minimum withdrawals from your traditional IRA accounts in 2010 based on their account value on December 31, 2009 and an IRS life expectancy factor. The RMD rules are even further off the radar screen for those individuals age 70-1/2+ with modified adjusted gross incomes in excess of $100,000 who were previously ineligible for a Roth IRA conversion who were anxiously waiting for 2010 to roll around so that they could finally do a conversion.

If you’re 70-1/2, before you rush out and convert a portion, or all, of your traditional IRA to a Roth IRA, you must first take your RMD. Why is this? If you own a traditional IRA at any time during the year and you’re at least 70-1/2 years old, IRS says that the first distribution from your IRA always includes your RMD amount. Furthermore, RMD’s aren’t eligible to be rolled over to other IRA’s, including conversion to a Roth IRA.

Consequently, even though your RMD and your Roth IRA conversion are both taxed exactly the same way as ordinary income, you must always first take your RMD before converting any portion of your traditional IRA to a Roth IRA. What are the consequences of not taking your RMD before doing a Roth IRA conversion and is there a way to correct this? For the answer to these questions, you’ll need to wait for next week’s blog post.

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