IRC 408A(e)(1)(B)(i), referring back to IRC 408(d)(3). This was a listener posed question and one that has a storm of confusion around it. However, a plain reading of the relevant regulatory provision, Internal Revenue Code 408(d) makes it quite clear that minimum required distributions are not eligible for a Roth IRA rollover. The problem may be that those who have actually taken out minimum required distributions and rolled them over never had to report what they did with the distribution other than reporting it as taxable income. What this means is that had the IRS been notified that that the minimum required distribution was rolled over to a IRA, the IRS would have disallowed the transfer. This is what you call a classic loophole. People are not being caught because of a reporting requirement and thinking that what they are doing is legal. In my opinion, the code is quite clear that minimum required distributions may not be rolled over to a regular IRA. The regulations issued by the IRS clarify this point. The regulation is set out below
§ 1.408A–4 26 CFR Ch. I (4–1–10 Edition). http://edocket.access.gpo.gov/cfr_2010/aprqtr/pdf/26cfr1.408A-4.pdf
Q–6. Can an individual who has attained at least age 701⁄2 by the end of a calendar year convert an amount distributed from a traditional IRA during that year to a Roth IRA before receiving his or her required minimum distribution with respect to the traditional IRA for the year of the conversion?
A–6. (a) No. In order to be eligible for a conversion, an amount first must be eligible to be rolled over. Section 408(d)(3) prohibits the rollover of a required minimum distribution. If a minimum distribution is required for a year with respect to an IRA, the first dollars distributed during that year are treated as consisting of the required minimum distribution until an amount equal to the required minimum distribution for that year has been distributed.
(b) As provided in A–1(c) of this section, any amount converted is treated as a distribution from a traditional IRA and a rollover contribution to a Roth IRA and not as a trustee-to- trustee transfer for purposes of section 408 and section 408A. Thus, in a year for which a minimum distribution is required (including the calendar year in which the individual attains age 701⁄2), an individual may not convert the assets of an IRA (or any portion of those assets) to a Roth IRA to the extent that the required minimum distribution for the traditional IRA for the year has not been distributed.
(c) If a required minimum distribution is contributed to a Roth IRA, it is treated as having been distributed, subject to the normal rules under section 408(d)(1) and (2), and then contributed as a regular contribution to a Roth IRA. The amount of the required minimum distribution is not a conversion contribution.