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March 6, 2009

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

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

QuestionLet’s say I take a http://retirementdictionary.com/definitions/distribution distributionin December, and leave only $10 in my http://retirementdictionary.com/definitions/traditionalira traditional IRA. This means that when my custodian calculates my http://retirementdictionary.com/definitions/requiredminimumdistributionrmd RMD amount, it will be $0.00 (rounding to the nearest dollar) since my December 31 http://retirementdictionary.com/definitions/fairmarketvaluefmv fair market value (FMV) will be $10. Given that I have 60-days to http://retirementdictionary.com/definitions/rollovercontribution 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 + http://retirementdictionary.com/definitions/outstandingrollover outstanding rollover contributions + http://retirementdictionary.com/definitions/outstandingtransfer outstanding transfers + http://retirementdictionary.com/definitions/outstandingrecharacterization outstanding recharacterizations of IRA or Roth contributions

• Outstanding rollovers are rollover contributions of distributions taken from a traditional IRA, http://retirementdictionary.com/definitions/substantiallyequalperiodicpaymentsepp SEP IRA or http://retirementdictionary.com/definitions/simpleira 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 IRA or Roth contributions 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.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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