Why must RMD be completed before doing ROTH conversion

[dmertz]

"There is no statute that authorizes the IRS to prevent traditional IRA RMD funds, on which taxes are fully paid,  from being converted to a Roth."

The statutes absolutely do prohibit such a conversion.  Section 408A(d)(3) defines a Roth conversion as a taxable rollover.  Section 408(d)(3)(E) prohibits rollover of an RMD.  This means that if any portion of an RMD is deposited into a Roth IRA, it is required to be treated as an ordinary Roth IRA contribution, not a Roth conversion.  (The term "Roth conversion" has specific meaning in the tax code, referring to section 408A(d)(3)(C).)

Congress delegated to the IRS the authority to develop the regulations necessary to implement the statutes.  CFR 1.408-8(b)(3) establishes that the first dollars out of an individual's IRAs are RMD until the RMD for the individual's traditional IRAs has been satisfied, eliminating ambiguity about which distribution is an RMD.

[user17717088430]

Thank you. I will assume you are correct, but without digging too deeply: The first reference to 408A(d)(3) that defines a Roth rollover as a taxable conversion is irrelevant, as taxes are due on all Roth conversions from a traditional IRA, whether as a result of an RMD or for any other reason. That would include funds rolled over that originated as an RMD. Section 403A(d)(3)(E) refers to "Special rules for contributions to which 2-year averaging applies." It does not expressly reference RMDs at all, and insofar as I am aware, RMDs are not "contributions to which two year averaging applies".  Perhaps you intended to refer to a different statute. 

[dmertz]

@user17717088430 , I referred to section 408(d)(3)(E) which prohibits rollovers of RMDs, not 408A(d)(3)(E).

[jestefan]

Can you please cite the IRS publication or better yet U.S. Code that states this? I cannot find either. Thank you.

[DaveF1006]

A Roth conversion is legally defined as a "qualified rollover contribution." Under the tax code, you cannot "roll over" any money that is classified as a Required Minimum Distribution. Here are some references that may pertain to you.

1. The Citation: 26 U.S. Code § 408(d)(3)(E) 
2. What it says: "Denial of rollover treatment for required distributions." It explicitly states that the rollover rules do not apply to any amount required to be distributed under section 401(a)(9) (the RMD rules).
3. The Logic: Since a Roth conversion is a rollover, and RMDs cannot be rolled over, an RMD cannot be converted.

2. The Treasury Regulation: The "First Dollars Out" Rule

1. This is the "gotcha" that forces the timing. The IRS has a regulation stating that if you are of RMD age, the very first money you take out of your IRA in a calendar year is legally deemed to be your RMD until that requirement is satisfied.
2. The Citation: 26 CFR § 1.408-8, Q&A-4 (specifically paragraph (a))
3. What it says: "The first dollars distributed during that year are treated as consisting of the required minimum distribution until an amount equal to the [RMD]... has been distributed."
4. The Logic: You cannot "skip over" the RMD to convert other funds first. Any attempt to convert money before taking your RMD results in the IRS viewing that "conversion" as actually being your RMD.

3. IRS Publication 590-A

For a plain-English explanation, the IRS clarifies this in their annual guide for taxpayers.

1. The Citation: IRS Publication 590-A, under the section "Can you move retirement plan assets?" and the sub-header "Required distributions."
2. What it says: "You cannot make a tax-free rollover of a required minimum distribution... Any amount converted to a Roth IRA is treated as a distribution from your traditional IRA and a rollover to the Roth IRA."

@jestefan 

[dmertz]

@jestefan , I've already provided the relevant code sections above.

[jestefan]

Thank you DaveF1006 for the detailed response!. Curiously, it appears the rules are different for Pension, Profit-Sharing, and Stock Bonus Plans in that the 'transferor plan' can retain the RMD amount until the end of the calendar year and thus is does not follow a "RMD first out" rule (cf., CFR § 1.401(a)(9)-7(c)(1) and CFR § 1.401(a)(9)-5(a)(3) This is a topic a work colleague has been working on w.r.t. our employer's ERISA retirement plans, specifically with TIAA.

[dmertz]

This thread was asking in regard to Roth conversions.  Transfers of employer plans have nothing to do with Roth conversions.

Transfers of employer plans require coordination between the plans and are typically the result of one employer acquiring another or an employer spinning off a portion of the business.  However, employee-initiated movements of funds between employer plans are done by distribution and rollover, and those rollovers are not permitted to be done until the RMD for the originating account has been satisfied.  Note that CFR § 1.401(a)(9)-7(c) applies only to transfers, not to rollovers.  CFR § 1.401(a)(9)-7(a) applies to rollovers, and that includes Roth conversions.

[jestefan]

Thank you dmertz for the clarification. Indeed the original question of Roth  conversions was still in play, but as you pointed out, the aforementioned part of the code I had referenced applies to transfers and not rollovers. Thanks again!