RMDs and Roth Conversions
RMDs must be taken before a Roth conversion can be processed. Who monitors the pecking order? Will the Custodian not allow a Roth Conversion before the RMD or is it more of a tax issue? The Custodian won’t know if the RMD was taken from another source. As long as an RMD is taken for the year does the IRS enforce the pecking order?
Permalink Submitted by Alan - IRA critic on Wed, 2022-01-05 17:21
As you indicated, custodians do not know about other TIRA accounts you may have, so they may issue a general warning, but most probably do not attempt to monitor the transaction orders. The IRS also does not receive any direct notification of transaction order either, so it is very likely that many seniors are converting before the RMD for the IRA funding the conversion has been completed with no consequence. Most likely, the IRS would have to audit the return for some other reason to discover the actual transaction order and perhaps they don’t care because they are still collecting their tax money for the RMD and the conversion. A more serious breach is actually converting the RMD, and the IRS does lose tax revenue when this occurs, and the 1099R/5498 reporting exposes this situation to the IRS, therefore the IRS does receive needed info for this error.