Avoid Penalties and Fees by Learning These Rules: Today’s Q&A Mailbag

This week’s Slott Report Mailbag looks into QCDs, RMDs, Rollover IRAs and Recharacterizations. As always, we recommend you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

Question:

I put $5,500 in my new Roth IRA for both 2016 and 2017 in April 2017. I later found out my income was too high to open a Roth IRA. Another person advised me to move that money to a Rollover IRA and file Form 8606 and convert to an IRA again.

Can I move over the money to a Rollover IRA (before tax money)? Afterwards, would I file form 8606 to make a non-deductible traditional IRA? I am afraid to go ahead. I appreciate your help.

Thanks!

Answer:

If you contributed to a Roth IRA and later discovered that your income is too high, it is not too late to fix the problem. Currently, you have an excess contribution in the Roth IRA. You will want to get those funds out of there before penalties begin to accrue. You can either remove the contribution as an excess or recharacterize the contribution back to a traditional IRA. The deadline for either of these transactions would be October 16, 2017 for your 2016 contribution and October 15, 2018 for your 2017 contribution.

If you decide to keep the funds in a traditional IRA and they are nondeductible contributions, you will need to file Form 8606 to claim the basis. You can also convert these funds to a Roth IRA. If you do, be sure that you are aware that a pro-rata formula will apply to the taxation of a conversion if you have other IRA funds. I mention this because you referred to a “Rollover IRA.”

Your best bet is to consult with a financial or tax advisor to help you decide which course of action is best for you and to be sure that all transactions are done properly. Good luck!

Question:

I will turn 70 1/2 on January 15, 2018. I plan to begin taking RMDs on a monthly basis next year. Can I also do a QCD on a monthly basis to my charity or do I have to do my QCD as a single lump sum distribution prior to taking any of my RMDs? I would like to receive monthly RMD distributions, as well as do a monthly QCD check to my charity. Is this possible?

Thank you.

Answer:

IRA owners who are age 70½ and over are eligible to do a QCD. Sounds easy, right? This is more complicated than it might sound. A QCD is only allowed if the distribution is made on or after the date that you actually attain age 70 ½. It is not enough that you will attain that age later in the year. So be sure that you are actually 70 ½ when you do the QCD.

Your QCD can satisfy your RMD. The rules allow QCDs to be paid monthly or as a lump sum. There is also no problem under the rules of having part of an RMD be paid to you and part be paid to a charity as a QCD. However, your IRA custodian may have their own policies on such things as how frequently a QCD can be paid and this may limit your options.