A client must take a required distribution for 2013. You use the balance of his IRA as of December 31, 2012 to calculate the distribution (since that is the balance on December 31st of the year prior to the actual distribution year). If clients have outstanding rollovers on December 31, 2012 or recharacterize 2012 conversions in 2013, the December 31, 2012 balance will need to be adjusted.
Outstanding Rollovers, Transfers and Recharacterizations
Outstanding Rollover Example:
What if on December 26, 2012 he withdrew all the funds from the IRA to roll them over to another IRA account? The client has 60 days to deposit the IRA funds in another IRA to complete the tax-free rollover, and he made that deposit the last week in January 2012, well within the 60 days. But on December 31, 2012 his IRA balance was zero. Does that mean that he does not have to take a required distribution? Nice try, but the answer is no. The IRS requires him to adjust the December 31, 2012 IRA balance for the outstanding rollover by adding back the funds that were rolled over to the IRA in 2013. That adjusted balance is the balance you would use to calculate his 2013 RMD. The same is true for a transfer that left one IRA but has not been posted to the receiving IRA.
The same adjustment would be required if a client had outstanding recharacterizations. For example, if a client converted all of his traditional IRA to a Roth IRA on December 20, 2012, then similar to the outstanding rollover example above, he would have no traditional IRA balance on December 31, 2012 because all the funds were in the RothIRA at that point. If later in 2013, he had recharacterized (undone) the Roth conversion, the funds would have been transferred back to his traditional IRA and you have to add the returned funds back to the traditional IRA balance similar to the way you have to add back the outstanding rollovers.
Outstanding Recharacterization Example:
Phil is over 70½ years old in 2012 and is subject to RMDs. You use the balance in his IRA on December 31, 2011 to calculate his 2012 RMD.
Phil has only one IRA and on December 20, 2012, after taking his RMD, he convertedthe entire account, $100,000, to a Roth IRA. Thus, Phil’s IRA balance on December 31, 2012 was zero. By August 5, 2013, his Roth IRA balance had sunk to $20,000 so he recharacterized it back to his traditional IRA so that he is not stuck paying tax on a $100,000 conversion which is now only worth $20,000. A recharacterization means reversing the Roth conversion and transferring the converted funds back to a traditional IRA. The recharacterization treats the funds as if they never left the traditional IRA.
Now the question is, which balance should be used to figure the 2013 required distribution? The answer should be the same as if no Roth conversion ever took place because that is the effect of a re-characterization. But IRS Regulations appear to state that the re-characterized amount (the amount actually transferred back to the IRA) is the amount to use. In that case (if the Roth balance decreased and the conversion was re-characterized), the RMD will be lower than if it was calculated without a conversion. In the example above, Phil’s 2013 RMD would be based on a balance of only $20,000, instead of $100,000.
These are the only two cases where you would use a balance other than the December 31 prior year-end balance.
Exception for 2013 RMDs only – Due to Qualified Charitable Distributions (QCDs):
In calculating the RMD for 2013, the IRS said that a January 2013 QCD for 2012 should be subtracted from your December 31, 2012 IRA balance. If not, you’ll take more than your 2013 RMD by using a higher IRA balance.