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IRA funds transfered to Roth IRA in 2018. Want to know if it can be done in 2018.
Just retired and had 401K funds transferred to Fidelity IRA account. With this done next step I want is to roll 20% of the funds to a ROTH IRA. Then in 1 Year (2019) take the RMD (based on the 4% factor) and use it to pay taxes on the funds transferred to the ROTH in the previous year (2018). Will this work going forward?
Your first RMD calculation is based on your total IRA balances on December 31st of the year prior to you turning 70.5. I will assume that date is December 31, 2017. Here's the Fidelity RMD calculator to help you with this: https://gpi.fidelity.com/ftgw/interfaces/rmd/#/rmdform
If your first RMD will be based on your 2017 IRA balances then your proposed 2018 Roth conversion will not impact your IRA end of year balance for December 31, 2017, but it will be subtracted from your December 31, 2018 balance.
Your second RMD will be calculated by using your 2018 IRA end of year balances (which will have been lowered by completing a 2018 Roth conversion).
Realize that you will have two different tax payments here, one for the Roth conversions and one RMDs. Also, Roth conversions after 2017 can not be re-characterized going forward.
Finally, nothing stopping you from doing Roth conversions after 70.5, but once RMDs start they have to be calculated and distributed first before considering future Roth conversions.
Ed Slott's Discussion Board does a nice job of answering these types of scenarios and I believe I have stated things correctly, but verify my take on your situation. Hopefully others well chime in here at MFO or I would suggest asking your question to (discussion Board found under resource link):
- You're planning to take money from your traditional IRA in 2019 to pay taxes on your 2018 Roth conversion. (I guess this from your saying you'd use RMD money, and there's usually no RMD on a Roth.) So far, so good.
- You're planning to take 4% (of what, the traditional IRA?) in 2019.
-- The "usual" 4% rule of thumb is for how much you can safely spend in a year (including "spending" on taxes); it's not an amount you must spend, or even move from investments to cash. Don't confuse RMDs, which are amounts that must be withdrawn from traditional IRAs - that's a tax event - with financial planning - how much money you have available to live on in retirement.
-- The first RMD is usually 1/27.4 = 3.65% (if your 70th birthday is the same year you turn 70.5) or 1/26.5 = 3.77% (if your 71st birthday is the same year you turn 70.5). You don't have to withdraw more than that from your IRAs, and you don't even have to sell any investments (you can just move that amount of securities from your traditional IRA to your taxable account).
- You'll owe taxes in April 2020 for whatever you withdraw from your traditional IRA in 2019.
- You'll be able to withdraw from your Roth tax-free, anytime, tax-free the money your converted in 2018 to your Roth tax-free at any time. But if you dip into the Roth earnings (which happens only after you withdraw all the converted moneys), you'll owe taxes on them unless you wait until Jan 1, 2023 (the beginning of the fifth year after conversion).
- Going forward, you're planning to convert more money each year. That will work if you take your RMD for the year before you do the Roth conversion.
I hope this explains a little better on what I am trying to accomplish. I just retired and down to 4 weeks of vacation left. I am 70 years 7 months old. Had a 401k company plan where I worked. Last Friday I received a check for the 401k and also on Friday I surrendered said check to Fidelity to establish an active IRA account. The figures I am using are pretty general in nature.
Also I am still working.
This week I want to convert 16% of the IRA funds in this just established IRA to an existing Roth IRA. I can still do this - right?
Bee I cant use the RMD calculator I Just funded the IRA. But generally a 4% figure is in the ball park.
Next year around April 15, 2019 I want to do an RMD withdrawal in a general amount of 4% used to pay taxes on the RMD and on 2018 16% IRA to ROTH IRA conversion.
From what has been written here - an IRA to ROTH IRA can still be done.
I want to do this every year till no IRA funds are left.
An RMD is a "required minimum distribution", to be a little obvious. It's a very precise amount determined by the IRS. It sounds like one of your concerns is that you satisfy the RMD requirements.
Going step by step:
1. RMD on 401k to IRA transfer:
a) If you are still working at the employer where you had your 401k, then there was no RMD requirement on the 401k.
b) If you terminated work at the employer with the 401k prior to transferring it, then I believe you must take an RMD from that 401k (based on Dec. 31, 2017 balance) before transferring the remainder to the Fidelity IRA. I'm not certain of this; a quick search turned up this piece (without supporting citations):
Since the RMD cannot be rolled over, the plan should first issue one check to the plan participant for the RMD before issuing any checks for a direct rollover. When the check for all the plan funds is issued to the plan participant, he can only roll over any amounts in excess of the RMD
If this information is correct, and if you transferred the full amount of the 401k to the IRA, Fidelity should be able to work with you to get the 401k RMD portion distributed to you.
2. Withholding on 401k to IRA transfer:
a) If the check you got from your employer was payable to Fidelity (as trustee or custodian for your IRA), withholding wasn't mandatory. But if you nevertheless elected to have some withheld for taxes, that amount (as well as any RMD, see above) will be taxable to you as 2018 income.
b) If the check you got was payable to you (i.e. you could have cashed the check yourself), then the employer was required to withhold 20% federal tax on the amount of the distribution above the RMD amount. As above, any money (RMD or taxes withheld) that didn't make it into the IRA will be taxable to you.
You can avoid taxes on the amount withheld by adding this money to your IRA as a 60-day rollover of the 401k. That is, you put back the money within 60 days of receiving the check. Note that you are not allowed to put the 401k RMD into your IRA.
3. 2018 IRA distribution:
a) If you had no traditional IRAs before establishing this one in 2018, you had no IRA RMD for 2018.
b) If you had other traditional IRAs at the end of 2017, then you must compute your RMD for all of those IRAs. You seem to be implying that you had other IRAs, because you talk about taking your RMD distribution (for 2018) by April 2019.
If you have an RMD for 2018 (case (b)), then you must take that RMD amount and set it aside before doing a Roth conversion. Until you do that, you are not allowed to convert 16% of the IRA into a Roth.
4. Future RMDs and conversions Each year you will need to compute your IRA RMD based on your December 31 balances and how many years the IRS says you can expect to live. You must first withdraw that amount from your IRA. After that, you'll be able to do your annual Roth conversions.
Disclaimer - this is not tax advice, just a little information I've picked up as I've gone along. It may or may not apply to you, it may or may not even be accurate information.
Comments
As far as RMDs, here's one of Fidelity FAQ (Fidelity FAQ Link):
Your first RMD calculation is based on your total IRA balances on December 31st of the year prior to you turning 70.5. I will assume that date is December 31, 2017. Here's the Fidelity RMD calculator to help you with this:
https://gpi.fidelity.com/ftgw/interfaces/rmd/#/rmdform
If your first RMD will be based on your 2017 IRA balances then your proposed 2018 Roth conversion will not impact your IRA end of year balance for December 31, 2017, but it will be subtracted from your December 31, 2018 balance.
Your second RMD will be calculated by using your 2018 IRA end of year balances (which will have been lowered by completing a 2018 Roth conversion).
Realize that you will have two different tax payments here, one for the Roth conversions and one RMDs. Also, Roth conversions after 2017 can not be re-characterized going forward.
Finally, nothing stopping you from doing Roth conversions after 70.5, but once RMDs start they have to be calculated and distributed first before considering future Roth conversions.
Ed Slott's Discussion Board does a nice job of answering these types of scenarios and I believe I have stated things correctly, but verify my take on your situation. Hopefully others well chime in here at MFO or I would suggest asking your question to (discussion Board found under resource link):
https://irahelp.com/phpBB
- You're planning to take money from your traditional IRA in 2019 to pay taxes on your 2018 Roth conversion. (I guess this from your saying you'd use RMD money, and there's usually no RMD on a Roth.) So far, so good.
- You're planning to take 4% (of what, the traditional IRA?) in 2019.
-- The "usual" 4% rule of thumb is for how much you can safely spend in a year (including "spending" on taxes); it's not an amount you must spend, or even move from investments to cash. Don't confuse RMDs, which are amounts that must be withdrawn from traditional IRAs - that's a tax event - with financial planning - how much money you have available to live on in retirement.
-- The first RMD is usually 1/27.4 = 3.65% (if your 70th birthday is the same year you turn 70.5) or 1/26.5 = 3.77% (if your 71st birthday is the same year you turn 70.5). You don't have to withdraw more than that from your IRAs, and you don't even have to sell any investments (you can just move that amount of securities from your traditional IRA to your taxable account).
- You'll owe taxes in April 2020 for whatever you withdraw from your traditional IRA in 2019.
- You'll be able to withdraw from your Roth tax-free, anytime, tax-free the money your converted in 2018 to your Roth tax-free at any time. But if you dip into the Roth earnings (which happens only after you withdraw all the converted moneys), you'll owe taxes on them unless you wait until Jan 1, 2023 (the beginning of the fifth year after conversion).
- Going forward, you're planning to convert more money each year. That will work if you take your RMD for the year before you do the Roth conversion.
I just retired and down to 4 weeks of vacation left.
I am 70 years 7 months old.
Had a 401k company plan where I worked.
Last Friday I received a check for the 401k and also on Friday I surrendered said check to Fidelity to establish an active IRA account. The figures I am using are pretty general in nature.
Also I am still working.
This week I want to convert 16% of the IRA funds in this just established IRA to an existing Roth IRA. I can still do this - right?
Bee I cant use the RMD calculator I Just funded the IRA. But generally a 4% figure is in the ball park.
Next year around April 15, 2019 I want to do an RMD withdrawal in a general amount
of 4% used to pay taxes on the RMD and on 2018 16% IRA to ROTH IRA conversion.
From what has been written here - an IRA to ROTH IRA can still be done.
I want to do this every year till no IRA funds are left.
Thanks for all the input I have received.
Gary
Going step by step:
1. RMD on 401k to IRA transfer:
a) If you are still working at the employer where you had your 401k, then there was no RMD requirement on the 401k.
b) If you terminated work at the employer with the 401k prior to transferring it, then I believe you must take an RMD from that 401k (based on Dec. 31, 2017 balance) before transferring the remainder to the Fidelity IRA. I'm not certain of this; a quick search turned up this piece (without supporting citations): https://www.irahelp.com/slottreport/rmds-must-be-taken-doing-rollover
If this information is correct, and if you transferred the full amount of the 401k to the IRA, Fidelity should be able to work with you to get the 401k RMD portion distributed to you.
2. Withholding on 401k to IRA transfer:
a) If the check you got from your employer was payable to Fidelity (as trustee or custodian for your IRA), withholding wasn't mandatory. But if you nevertheless elected to have some withheld for taxes, that amount (as well as any RMD, see above) will be taxable to you as 2018 income.
b) If the check you got was payable to you (i.e. you could have cashed the check yourself), then the employer was required to withhold 20% federal tax on the amount of the distribution above the RMD amount. As above, any money (RMD or taxes withheld) that didn't make it into the IRA will be taxable to you.
You can avoid taxes on the amount withheld by adding this money to your IRA as a 60-day rollover of the 401k. That is, you put back the money within 60 days of receiving the check. Note that you are not allowed to put the 401k RMD into your IRA.
3. 2018 IRA distribution:
a) If you had no traditional IRAs before establishing this one in 2018, you had no IRA RMD for 2018.
b) If you had other traditional IRAs at the end of 2017, then you must compute your RMD for all of those IRAs. You seem to be implying that you had other IRAs, because you talk about taking your RMD distribution (for 2018) by April 2019.
Note the deadline for the first RMD is April 1, not April 15, of the following year. RMD deadlines for subsequent years are on Dec 31.
https://www.irs.gov/newsroom/many-retirees-face-april-1-deadline-to-take-required-retirement-plan-distributions
If you have an RMD for 2018 (case (b)), then you must take that RMD amount and set it aside before doing a Roth conversion. Until you do that, you are not allowed to convert 16% of the IRA into a Roth.
4. Future RMDs and conversions
Each year you will need to compute your IRA RMD based on your December 31 balances and how many years the IRS says you can expect to live. You must first withdraw that amount from your IRA. After that, you'll be able to do your annual Roth conversions.
Disclaimer - this is not tax advice, just a little information I've picked up as I've gone along. It may or may not apply to you, it may or may not even be accurate information.