RMD pymt directly rolled to Roth IRA
We have a client that seemingly rolled some of his 2021 RMD $ [ from a group 403b plan ] directly to his Roth IRA. I’m fairly certain he cant [or shouldn’t have been able to do this ] Perhaps I’m wrong. He didn’t speak to anyone, We’re a big firm and it was seemingly done electronically without oversight.
The question now is : What is really allowed ?
Technically, in his case he had enough earned income during the year [ 2021 ] so he is/was definitely eligible for a Roth ‘contribution’ of $ 7000.
We classified the $$ paid as a ‘taxable’ RMD payout and therefore the 1099R distribution code ‘7’ should be in place on the distribution side. That said, on the Roth IRA side, it seems be showing/coded as ‘rollover IN’ which in my estimation is the problem. If it were up to me, I’d say he should get the $$ paid back to him in excess of everything above the $ 7000 contribution limit. Then the 1st $ 7000 that was ‘rolled’ in should be reclassified as a ‘contribution.’ Perhaps that last step is irrelevant.
Your thoughts ?
Permalink Submitted by Alan - IRA critic on Tue, 2021-12-21 00:27
It’s a long shot, but you might check with the client if client might possibly have completed his total 403b RMD from any other 403b plans he might have, since 403b RMDs can be aggregated. But assuming he did not, then this 403b distribution must be reported as taxable (Code 7 will help as opposed to Code G). Then the full rollover should be distributed as an excess regular Roth contribution with allocated earnings. The earnings will be taxable in 2021. The Roth custodian could retain 7000 of the return and apply it as a regular Roth IRA contribution and report that on Form 5498. But they will also report a rollover contribution from the 403b on a 5498, and the client’s tax return will need an explanatory statement regarding the excess contribution (Rollover of RMD) and that it was returned as an excess regular Roth IRA contribution. As you can see this is a reporting hassle and a challenge communicating to the IRS the entire sequence.