IRA distribution as Roth contribution

Submitted by Alan Myers on Sat, 2023-09-30 03:38

I have a client that is semi-retired. She is taking RMDs from her IRA. She also has a Roth IRA and she works enough (self-employed) to have earned income to make a contribution to her Roth. Over the past few years, the custodian allowed for a Roth conversion and counted that as part of the RMDs from the IRA. I think they viewed it as a simultaneous distribution to the client (RMD) and a deposit by the client into the Roth. The custodian has changed and the new custodian is requiring proof of satisfaction of RMDs before allowing for a conversion of funds from the IRA to the Roth. Is this correct? Do we have to do this in two separate transactions?



Submitted by David Mertz on Sat, 2023-09-30 15:12

  • Taking an RMD from the traditional IRA and using those funds to make a regular Roth IRA contribution is not a conversion, but constitutes two independent transactions.  (Cash is fungible, so the fact that the same cash is involved in both transactions is irrelevant.)  For these transactions the client should not be making any mention of a conversion but should instead be telling the custodian to deposit into the Roth IRA as a regular contribution some or all of the cash that was distributed from the traditional IRA.  The amount deposited into the Roth IRA in this case is reported in box 1 of the Form 5498, not in box 3.
  • Actual Roth conversions (which are not subject to contribution limitations) can be done only after having completed the RMDs for the individual’s traditional IRAs and are separate from any regular Roth IRA contributions.  Roth conversions are reported in box 3 of the Form 5498.

Submitted by Alan Myers on Sat, 2023-09-30 18:30

Thanks for the reply.  Actually, in past years, that is exactly what we did – distribution was done as a rollover to the Roth IRA.  Last year, to begin conforming to the new custodian, the old custodian required it to be done using a “conversion” form rather than distribution that was deposited into the Roth.  That was also my understanding of how things should go.  We take a distribution from the IRA, which satisfies some or all of the RMD requirements and (as long as the client has earned income sufficient to cover), some of this distribution is deposited into the Roth all in one easy transaction.  Why am I not looking forward to talking to the new custodian on Monday?  🙂

Submitted by Alan - IRA critic on Sat, 2023-09-30 19:11

  • If the distribution was done as a rollover (conversion), the 5498 will so indicate as DMx indicated so they must be checked.  However, since an RMD cannot be converted, the distribution must be first applied to the amount of the RMD, and that amount becomes an excess regular Roth IRA contribution that must be removed in a corrective distribution to the extent it exceeds the amount of regular Roth contributions that the taxpayer is eligible for and not yet made.
  • Amounts that were allowed as conversions would have been reported on Form 8606, but amounts that were RMDs and not eligible for conversion would be reported as a distribution and not shown in Part II of Form 860 since they would become an excess regular (not conversion) contribution to the Roth IRA.
  • This really is not a costly mistake if corrected before any excise taxes are incurred, but it would be a reporting mess.
  • If client had more than one traditional IRA, the aggregation rules may have changed the above scenario.
  • Apparently the new custodian is trying to prevent the conversion of RMDs. To eliminate confusion and miscommunication, it would be preferable to separate these two transactions.

Add new comment

Log in or register to post comments