Interesting IRA situation
Ran into this the other day. Just like to check to see if what happened is compliant with IRS rules
Seems in 2024, a 75 year old single man with a relatively large TIRA did a $20,000 Roth conversion early in the year thinking this would satisfy his annual $20,000 RMD. He also has a part time job with his wages totaling $12,000 for the year. He made no other TIRA withdrawals or contributions for 2024.
If I understand this correctly, the early Roth conversion amount is considered by the IRS to be an RMD withdrawal that was then contributed to his Roth IRA so there is no 25% penalty for failing to take his RMD for 2024. So the $20,000 Roth conversions is really a $20,000 Roth contribution, which would create an excess contribution, although the first $8,000 of it would be considered a valid contribution due to his earned income for 2024, thus leaving $4,000 in excess Roth contribution, which must be withdrawn, plus any gains, by Oct 15, 2025.
Is this correct?
Permalink Submitted by Alan - IRA critic on Tue, 2025-06-10 16:39
Yes Bruce, this is correct.
As long as his MAGI is not too high for a Roth contribution, and there were no other Roth or TIRA contributions made for 2024, the person only has an excess Roth contribution of 12,000 which needs to be removed by 10/15, the extended due date.
This is not a costly situation but is definitely a hassle to report. The 2024 return must report the 20,000 as a taxable distribution which satisfies the RMD, and nothing as a conversion. Any earnings returned with the return of excess will be taxable on the 2024 return, and the return should include an explanatory statement regarding the excess contribution and removal. The IRS will then know that the 5498 reporting a conversion contribution that was issued in May for 20,000 is incorrect. This Roth is probably qualified, so basis tracking should not be needed as Form 8606 is no longer needed to report Roth distributions.
Permalink Submitted by BruceM on Wed, 2025-06-11 10:52
Alan
Good point on the excess contribution + earnings being reported on the 2024 tax return, which means if a return was already filed, it will need to be amended. And not to make this any more complicated than it is, but it seems this is the first Roth IRA for this 75 year old, who did the RMD-Conversion in response to an article he’d read. So sounds like he’ll have to wait the 5 years for withdrawals to be qualified.
Permalink Submitted by Jane Early on Wed, 2025-06-11 11:16
Is the excess contribution not $12000? I didn’t think you could convert a TIRA RMD to a ROTh. If the whole $20,000 was the TIRA RMD, why is there only an $8000 excess to the Roth?