Ask Bob: Is It Possible To Convert RMDs Into A Roth IRA?

Robert Powell, CFP®

Question

As an IRA owner I withdrew the majority (80%) of my RMD (required minimum distribution) in January 2020 so I’m now past the 60-day rollover limit. I put the money in a high yield savings account with no federal income tax withheld. I really don't need the funds, so can I take these funds and convert them into my Roth IRA without paying income tax for year 2020?

For the balance of my 2020 RMD (20%) I have set up a qualified charitable distribution (QCD) with equal payments starting in January 2020 on a monthly basis. I have made 4 payments so far this year to the charity with no income tax withheld. I can stop making the payments from my RMD and continue making my payments with non-qualified funds. Depending on the answer to my first question, then can I take the balance of the RMD funds for the year and rollover to my Roth account without paying income tax?

Answer

First, here's a quick summary of the challenges posed by the transactions, given today’s tax environment, according to Hunter von Unschuld with Fractal Profile Wealth Management. 

  • RMDs are always subject to tax.
  • You must have earned income to make a Roth contribution.
  • An RMD cannot be rolled over to a Roth via a conversion. Only money you take above the RMD amount can be converted to a Roth, and, you must pay taxes on amounts converted.
  • For 2020, RMDs have been suspended. You do not have to take your RMD for 2020.

Von Unschuld recommends consulting with a CPA about specific tax advice for your situation and for handling your qualified charitable distribution.

For his part, James Ferguson III, CFP, managing partner and co-founder of Roan Capital Partners, says many wish the CARES Act was enacted Jan. 1, 2020 rather than March 27, 2020 but pandemics don’t work on perfect calendar year time tables.

So, unfortunately, you cannot take the funds that have been distributed and convert to a Roth IRA in your situation under current guidelines, says Ferguson.

One thing to explore individually would be around the CARES Act and the ability to retroactively treat a withdrawal as a coronavirus-related distribution, he says. The guidelines currently around this qualification are specific. “If you meet the qualifications to retroactively treat this as a coronavirus-related distribution you could be afforded the opportunity to utilize the IRS Notice 2020-23,” he explains. This could enable you to rollover these funds for up to three years to an IRA, then convert the funds to a Roth IRA. Ferguson adds, the IRS could introduce further guidance in the future on this exact situation.

Regarding the remaining RMD amount, Ferguson says, yes, you can convert it to your Roth IRA from the balance in your IRA. “The taxes can be paid from the amount converted or out of pocket. Taxes will have to be paid on this Roth conversion just as any other conversion would require,” he advises.

If, however, you are asking if you can use the provision for the three-year income spread over 2020, 2021 and 2022 for your conversion, Ferguson advises against this. “This type of interpretation under current guidelines seems to go against the intent of the CARES Act and could cause adverse implications,” he says. As always consult your tax advisor on your specific situation.

Watch https://www.thestreet.com/video/retirement-coronavirus-cares-act.

Got questions about Social Security, Medicare, retirement, investments, or money in general? Get answers. Email Robert.Powell@Maven.io. Kim McSheridan assisted with this report. 

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Robert Powell, CFP®