Required Minimum Distributions and Roth Conversions
Wednesday, May 12, 2010
By Beverly DeVeny, IRA Technical Expert Follow Me on Twitter: @BevIRAEdSlott
If you are doing a Roth conversion this year and you are age 70 ½ or older, the RMD must be taken before you do the conversion. The conversion is considered a distribution and RMD funds are considered to be the first funds distributed from the account. RMDs cannot be moved into the Roth IRA.
When an RMD amount is mistakenly put into the Roth IRA, it is considered an excess contribution. An excess contribution that is not timely removed is subject to a penalty tax of 6% per year for every year that it remains in the Roth IRA. This penalty is reported on Form 5498 which must be filed with your tax return.
How do you correct an excess contribution? First of all, you must tell the Roth IRA custodian that you are removing an excess contribution. Just taking the RMD out as a distribution does NOT correct the situation. You have until October 15th of the year after the conversion to remove the excess contribution without penalty. You must remove a net amount – earnings or losses on the excess contribution amount (the RMD) must be removed along with the excess contribution.
There is no way out of an RMD – not even death. So remember to take those RMDs before you convert to a Roth IRA.
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