dmertz
Level 15

Retirement tax questions

The order absolutely matters, so you do have a problem.  RMDs must be satisfied before any Roth conversions are done because, no matter what you do with the money, the tax code says that the first dollars out go toward satisfying your RMD,  that RMDs are not eligible for rollover, and that a Roth conversion consists of a distribution from the traditional IRA and a taxable rollover to the Roth IRA.  See CFR 1.408A-4 Q&A-6:

https://www.law.cornell.edu/cfr/text/26/1.408A-4

 

If a Roth conversion transaction is done before the RMD is satisfied, some or all of the amount of the intended Roth conversion is a failed conversion.  The portion that is a failed conversion constitutes an ordinary Roth IRA contribution and is an excess contribution to to the extent that it exceeds the amount that you are eligible to contribute to a Roth IRA as an ordinary contribution.

 

Given that you did the Roth conversion before satisfying the RMD, you con only report as converted the amount in excess of the RMD.  Also given that you took an additional distribution later in the year equal to the total amount of your RMD for the year, you have taken out more than necessary to satisfy your RMD.  If you are ineligible to have made an ordinary Roth IRA contribution and your Roth conversion transaction was more than your RMD for the year, you have an excess Roth IRA contribution equal to the amount of your RMD and that needs to be corrected by a return of excess contribution.  Given the market performance this year, it's likely that that return of excess contribution will also need to include the net income attributable to the excess contribution.

 

If the amount of your Roth conversion transaction was more than your RMD and your distribution late in the year that was intended to be a distribution of your RMD occurred within the last 60 days, you could complete the Roth conversion of that distribution by depositing it into a Roth IRA as a Roth-conversion contribution.

 

As you pointed out, the combined amounts will be reported on a single Form 1099-R, if you ignore the problem and do nothing to correct it, the IRS would only detect a problem if they audit these transactions.  If they ever do discover the uncorrected excess contribution, they could assess years of excess-contribution penalties and interest.

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