Roth Conversion before RMD
I just made this mistake .. sold some stock to enable my RMD but didn’t actually do the RMD yet. Then went and transferred some stock to ROTH in a seperate transaction. The second order completed but still waiting on first. I was thinkingVanguard would stop me if I went to ROTH before RMD but I guess that didn’t happen. Now there’s a 6% penalty ? Not sure what to do now to minimize a penalty.
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-05 11:09
VG would not block your conversion because they have no way of knowing that you did not complete your RMD from some other IRA not at VG.
Doing the conversion first results in the IRA conversion distribution still being treated as the RMD, so if your conversion was at least equal to the RMD, then your RMD is satisfied. The problem is that the RMD amount was not eligible for rollover (a conversion is a rollover) so this amount is treated as an excess Roth IRA contribution that must be removed from the Roth IRA.
If you tell VG that you converted your RMD and therefore you need to have it distributed as an excess Roth contribution, they will do so and calculate any gain or loss on the excess, then distribute the adjusted amount out of your Roth IRA. As long as you complete this by your tax due date, there will be no 6% excise tax. If you have this excess removed by year end, you will get a 1099R coded to show removal of the excess. Any gains in Box 2a of that 1099R will be taxable income on your 2025 Form 1040, but that amount should be very small. Do NOT simply take a distribution from your Roth IRA equal to the RMD, as that will not correct the excess. The excess must be removed with a gain/loss calculation as described above or you will still owe the excise tax.
The correction taxes will be very small or nothing, so the main issue will be tax reporting complexity because you will not be able to report the RMD portion of the conversion as a conversion, despite VG issuing a 5498 showing the full amount as a conversion. You will have to include an explanatory statement with you return explaining that you converted your RMD and removed that amount from your Roth as an excess contribution removal.
NOTE: If you have any other TIRA accounts from which you completed your total RMD for all TIRAs before doing the conversion, you would be OK, as your conversion would then be allowable.
Permalink Submitted by RonC on Fri, 2025-09-05 11:32
Thank you. I just spoke with VG and intitiated an in-kind xfer from TIRA to Taxable Brokerage to expedite satisfying the RMD. They say it will most-likely execute today and a an in-kind would use yesterday’s date .. putting things back in the proper sequence ? Not sure if that will save me .. otherwise I’ll have to go with the more complex resolution. Thoughts ? Thanks again, Ron
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-05 11:50
You should not have taken another TIRA distribution. Note that your RMD has been satisfied as I explained above, so the last thing you need to do is increase your taxes by taking another TIRA distribution. Call VG back and try to stop this additional TIRA distribution, which will only add to your taxes.
You have an excess contribution in your Roth IRA that needs to be corrected whether you take another distribution or not, and the removal of that Roth excess to your taxable account will put you in the same position as you would have been had you not converted until the RMD was completed.
What is your RMD amount, and how much did you convert?
Permalink Submitted by RonC on Fri, 2025-09-05 12:04
RMD was about 53k, took 5k earlier in year so 47k is still outstanding. ROTH conversion was about 15k. If Roth conversion was this morning and if the in-kind xfer to satisfy RMD uses yesterday, or even today, wouldn’t that work ? If worst case is I’d have to take another 15k distribution, not as a ROTH conversion, I’d be ok, worst would be explanation to IRS.
Permalink Submitted by Alan - IRA critic on Fri, 2025-09-05 13:17
Yes, that would work as long as the conversion was not processed BEFORE the day your RMD is completed. If so, there is no excess Roth contribution.
The 5k taken earlier applies to the RMD, leaving 47k. If the Roth conversion is processed today and if you withdraw the remaining 47k also today, you will be OK. But if the conversion is processed prior to the day you take the rest of your RMD, then you will have an excess contribution of 15k from converting the RMD and would have 33k remaining of your RMD (53k less 5k less 15k) that you could take any time before year end. Your total taxable income will be 68k (53k RMD plus 15k conversion).
Permalink Submitted by RonC on Sat, 2025-09-06 09:31
Well these transactions were done late last night and appear to have worked .. both were processed on 9/5 except trade date is shown as 9/4 for the in-kind transfer (moving 47k of stock to satisfy RMD). the stock went down a few hundred so I pay taxes a on a slightly larger amount and thankfuly the larger withdrawal amount is what counts toward the RMD .. or so it seems. Otherwise I would’ve come up short of satisfying the RMD by a few hundred. I think I’m okay now but would like to hear that from you .. if possible. I was surprised that VG couldn’t stop, cancel or even put a hold on the conversion that was “pending” .. what if I mis-typed a much bigger number .. like 470k vs 47k .. I’d have to come up with the taxes and have a much bigger problem !
My original plan to sell stock in TIRA has yet to be made available as “cash” so that method is NOT as quick as I expected. I learned my lesson and apologize for taxing others such as yourself. Sincerely appreciate the help though, Ron
Permalink Submitted by Alan - IRA critic on Sat, 2025-09-06 11:06
Yes, if the transaction date for both the conversion and the RMD is the same date (or if the conversion was a later date) you are OK.
Both the conversion and the RMD can be done in kind without selling any investments, but due to small value changes between your order and processing, it is tougher to exactly hit your amounts.
With conversions you have to be very careful when entering the amounts because conversions can no longer be recharacterized back to TIRA to correct the amount. You would be stuck with a higher tax bill.
There are also timing requirements for QCDs if want to make them to reduce your taxable RMD. Any QCDs should be completed before or at the same time as your RMD is completed, and any conversions should be done later.
Permalink Submitted by RonC on Sat, 2025-09-06 11:20
I won’t make this mistake again and I’ll be more careful typing and checking.
Thanks again .. very much.