IRA RMD after conversion
Hello. New user here. I have one traditional IRA (TIRA) and one Roth. No other retirement accounts. Earlier this year I converted $45K from my TIRA to the Roth, which is the first time I have ever done so. I was planning yesterday to do my RMD of $41K when I discovered, due to posts in this forum, that I made an error: the RMD must occur before the conversion. My fault for not understanding all the rules! I also read, again thanks to this forum, that $41K of that conversion is considered an excess Roth contribution and needs to be removed, and how to do that. Fortunately, the custodian of my accounts makes that relatively simple and that is my plan.
Before I do so, however, here is my question. Can I make my regular $41K RMD to a NON-retirement account now, as I have done in years past? By doing so I will end up the year with a $41K RMD and a $45K conversion, which is what I intended – they just won’t have been done in the right order. Is the order critical here, or will I be OK if all is correct in the end?
Many thanks in advance for any assistance you can provide.
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 17:28
This mistake in the distribution order is commonplace, and because the dates of distributions are not reported to the IRS, most of these skate through without a problem. The risk is that if the IRS finds out later due to an audit or other means, you will owe a 6% excise tax for each year of the excess Roth contribution because you will not have removed the excess in time. If you remove the excess now, there will be no excise tax, just income tax on the gains the 41,000 generated in your Roth. This is not very costly, but presents a filing hassle because your return will not conform to the 1099R forms issued, and you will have to include a detailed explanatory statement with your return.
To correct the error, note that your 41,000 RMD was satisfied by the intended conversion, so if you explain to the custodian that you converted your RMD and need to have 41,000 treated as an excess Roth contribution, they will return that to you with earnings and issue a 1099R for the removal of excess and earnings. The earnings will be taxable on your 2021 return. Your RMD will then be in cash like it should have been in the first place, so to square things up you will have to do another 41,000 conversion. You end up with 45,000 converted to Roth as you intended and reported on Form 8606, and 41,000 (plus some earnings) in your cash account. To be clear, you do not need to take another RMD because your RMD was distributed earlier, but you will need to do another 41,000 conversion since the first 41,000 conversion cannot be reported as such.
Permalink Submitted by Rand Cork on Thu, 2021-12-16 18:33
I will do that. Thanks very much for the prompt and clear response!