Life and Death Planning for Retirement Benefits

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Chapter 5: Roth Retirement Plans 229
If funds are rolled or transferred from a traditional plan or IRA to a Roth IRA before the
RMD for the year of the conversion has been distributed out of the traditional plan or IRA, the
conversion cannot be a valid Roth conversion to the extent of the RMD. The IRS created a special
rule to deal with this situation: The IRS treats the RMD that was improperly “rolled” to the Roth
IRA “as if” (1) the RMD had been distributed out of the traditional plan and (2) the recipient then
contributed the same amount to the Roth IRA as a “regular contribution” . Reg
A-6(c).
Because of this special IRS rule there will be no penalty for failure to take the RMD
; the RMD is deemed to have been distributed, and the Roth conversion (to the extent the
converted amount exceeded the RMD) is valid. However, the “deemed” regular contribution to the
Roth IRA will usually result in an “excess contribution” to the Roth IRA, either because the
deemed contribution is larger than the permitted maximum regular contribution or
because the person is not eligible to make a regular contribution to a Roth IRA at all. A person
who is eligible to convert to a Roth may be ineligible to make a regular contribution to
a Roth IRA . An excess contribution to the Roth IRA will generate an excess-contribution
penalty unless the excess contribution (along with the net income attributable to it) is
withdrawn from the Roth IRA prior to the deadline for corrective distributions; se
Gideon Example: Gideon, age 78 and retired, converted his $1 million traditional IRA to a Roth
IRA in 2010. Unfortunately he failed to take the 2010 RMD from the traditional IRA before doing
the conversion. Assume his 2010 RMD was $50,000. The good news is that the $50,000 is treated
as if it were distributed to him from the traditional IRA, so he does not have to pay the penalty for
failure to take an RMD. The bad news is he has made an excess contribution of $50,000 to the
Roth IRA. To avoid a six percent penalty on that excess contribution, he must withdraw the
$50,000 (plus net income attributable to it) by October 15, 2011. There is no possibility of treating
any part of this improper rollover contribution as a proper “regular” contribution to the Roth IRA;
because Gideon is retired, he has no compensation income, and thus is not eligible to make regular
contributions to any IRA . Compare “Armande Example, I).
5.2.03 Tax treatment of Roth IRA distributions: Overview
“Qualified distributions” from a Roth IRA are income tax-free. It is relatively easy to
qualify for “qualified” distributions; see The requirements for a qualified
distribution from a designated Roth account (DRAC) are slightly different; see
Nonqualified distributions from Roth IRAs may or may not be tax-free; see or
nonqualified DRAC distributions).
Regarding the tax basis of property distributed from a Roth IRA, see
A. Qualified vs. nonqualified distributions. Qualified distributions from a Roth IRA are not
included in the recipient’s gross income for federal income tax purposes, regardless of
whether the recipient is the participant or a beneficiary Reg. A-
1(b)(2).
Shane Example: Shane has a Roth IRA. He receives qualified distributions from it. These are
excluded from his gross income. Shane dies, leaving his Roth IRA half to his son and half to the
Shane Family Trust. The son and the trust both take RMDs and other distributions from the Roth
IRA, all of which are qualified distributions. These qualified distributions are income tax-free