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I think found a way to avoid taking RMDs. Can you tell me if it could work?

Last Updated October 23, 2012

Question: 

Let’s say I take a distribution in December, and leave only $10 in my traditional IRA. This means that when my custodian calculates my RMD amount, it will be $0.00 (rounding to the nearest dollar) since my December 31 fair market value (FMV) will be $10. Given that I have 60-days to rollover the amount, I can rollover the amount in January, bringing my balance back to what it was before I took the distribution.  I think I can do this every year and always avoid the RMD. Do you agree? And if not, why not?

Answer: 

No. That will not allow you to avoid taking your RMD.

Under the RMD regulations, the December 31 fair market value (FMV) used to calculate your RMD must be calculated as follows:

December 31 FMV + outstanding rollover contributions + outstanding transfers + outstanding recharacterizations

 

  • Outstanding rollovers are rollover contributions of distributions taken from a traditional IRA, SEP IRA or SIMPLE IRA that are timely rolled over to another traditional, SEP or SIMPLE IRA after December 31
  • Outstanding transfers are transfers initiated before the end of the year and left the delivering traditional, SEP or SIMPLE IRA before December 31, but did not get credited  to the receiving traditional, SEP or SIMPLE IRA until after December 31
  • Outstanding recharacterizations are conversions that are timely recharacterized after December 31

Therefore, in the example you gave, you are required to add (back) the amount that you rollover within 60-days to your December 31 FMV, in order to determine your correct RMD amount.

In short; you cannot avoid taking your RMD by completing a distribution before year-end, only to rollover the amount (within 60-days) after the end of the year.

Your IRA custodian will likely use the December 31 FMV they have on record when they calculate your RMD. Therefore, it is your responsibility to ensure the amount is refigured, using the adjusted December 31 FMV.

 

Individuals who convert amounts to a Roth IRA, and recharacterize the amount after December 31, must add the conversion amount  plus any NIA to the December 31 FMV of the IRA to which the recharacterization is made, for purposes of determining the IRA owner’s RMD.