Roth Conversion in the age 70.5 year?

[Guest reg_h2b]

I know Barry among others has written about a Roth Conversion in the year in which one turns 70.5 and the first MRD due for that year:

"There has been some discussion about individuals who turn age 70½ in 1998, and wish to convert their traditional IRAs to Roths. It has been suggested for such taxpayers to postpone their initial required minimum distribution until the beginning of 1999 (prior to April 1st) in order to stay under the $100K income limitation for conversion in 1998.

PLEASE BE ADVISED that the IRS' position on this issue is that you CANNOT postpone the required minimum distribution and convert your traditional IRA to a Roth. This is made very clear in Prop Reg 1.408A-4, Q&A-6. You MUST take your required minimum distribution prior to conversion.

In Prop Reg 1.408A-4, Q&A-1, A-1©, the regulation states that even if the conversion from a traditional IRA is accomplished by means of a trustee to trustee transfer, it is a qualified rollover for purposes of both Sec 408 and Sec 408A. By being a rollover, and not a trustee to trustee transfer, the rule of Sec 408(d)(3)(E) which prohibits the rollover of a required distribution is applicable.

I personally disagree with the IRS on their position, mainly because a minimum distribution is not required until April 1st of the year following the attainment of age 70½. However I have yet to find a taxpayer willing to be the test case to litigate this issue."- Barry Picker per "Roth IRA Web Site"

Questions:

1. Can TIRA owner do a partial conversion to a RIRA and still satisfy the IRS's position and avoid the MRD distribution in 2001?

Example, for 2001 (year owner turns 70.5) owner converts X% of TIRA into a RIRA in 2001 such that Y% of TIRA remains as a TIRA. The Y share of the TIRA equals the MRD for the whole original TIRA. Then by 4/1/2002 (owner's RBD) all of the TIRA is distributed. Will that fly with the IRS?

This seems a fairly obvious way to get around the MRD effecting the $100K limit so I'm suspicious that this strategy will work.

THOUGHTS???

Reg Jones

[Appleby]

NO! The IRS’ position on this is very clear. The first distribution from your IRS is deemed to be (or include is it is more than) your RMD. Therefore, the individual who attains age 70 ½ in 2001 must take his/her RMD before doing a partial or full conversion. Remember that the RMD is due for 2001. The April 1,2002 extension for the first RMD is merely that, as extension…

[Guest reg_h2b]

Thanks for the response. My question really was about why the inintial distribution has to FIRST be considered a MRD as opposed to a Roth Conversion. This quote from the Final Roth Regs Commentary seems to address my question:

"Additionally, several commentators suggested that the rule in the proposed regulations is inconsistent with section 401(a)(9), which generally requires that IRA distributions begin by April 1 of the calendar year following the calendar year in which the IRA owner reaches age 70 1/2. These commentators argued that, under section 401(a)(9), distributions made during the calendar year in which the IRA owner reaches age 70 1/2 should not be considered required minimum distributions under sections 401(a)(9) and 408(a)(6) and (B)(3). However, the proposed regulations under sections 401(a)(9) and 408(a)(6) and (B)(3) provide that the first year for which distributions are required under section 401(a)(9) is the year in which the IRA owner reaches age 70 1/2, and that distributions made prior to April 1 of the following calendar year are treated as made for that first year. The regulations under section 402© and the proposed regulations under sections 401(a)(9) and 408(a)(6) and (B)(3) provide that the first amount distributed during a calendar year is treated as a required minimum distribution to the extent that the amount required to be distributed for that calendar year under section 401(a)(9) has not been distributed. For these reasons, the final regulations retain the rule of the proposed regulations."

[BPickerCPA]

The answer is, It HAS to be because that's what the IRS says it is.

In the scenarios that I had envisioned back in 1998, the individual would have kept the MRD in the traditional IRA, converted the balance, and then in the following year they would take the MRD. So the MRD was never suppose to be eliminated.

The IRS won't change the position because the law will change in 2005 so the MRD won't count towards the $100K AGI conversion limit.

Barry