For RMDs and Roth conversions does sequential order matter?

[user17670490862]

For 2025 I have completed all my RMDs and also a Roth conversion.
The only thing is I did the Roth conversion early in the year and the RMDs late in the year.
Some say that makes the Roth conversion invalid, is considered an excess contribution, and it must be removed from the Roth.
Others say no, as long as RMDs are complete at year end, any excess distributions above the RMD are eligible for conversion.  So, the 1099-R will show total distributions, the 5498 will show what entered the Roth, and the 8606 will show how much was a valid conversion after subtracting the RMD.
Please verify that I don't have a problem and that the sequential order doesn't really matter in my case.

[dmertz · Accepted solution]

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.

[user17670490862]

Thank you for response !

The examples here mentioned if the Roth conversion transaction was more than the RMD. In my case the Roth conversion transaction was less than the RMD.

Is there a way to correct my situation and also keep the Roth conversion amount in the Roth account somehow.

Here are my example numbers to show magnitude.

RMD for 2025 = 8000
IRA Distribution Feb 2025 Roth Conversion = 4000
IRA Distribution Dec 2025 to cover RMD = 8000
Not eligible for ordinary Roth IRA contribution

Is my error correctible. What would be the process and timing? Possibly deposit another 4000 into Roth from the RMD (is that allowed), then remove 4000 that was the ineligible amount from February?

Thank you !

[dmertz]

Using your example numbers, the February distribution that was deposited into the Roth IRA satisfied half of your RMD and the distribution in December more than satisfied the other half of your RMD.

Because the distribution from the traditional IRA in February was entirely RMD, this amount deposited into the Roth IRA constitutes an ordinary Roth IRA contribution despite you intending it to be a conversion.  If you are eligible to treat the amount deposited to the Roth IRA in February as an ordinary Roth IRA contribution, you could just leave that money in the Roth.  Otherwise it's an excess contribution that needs to be removed by an explicit return of contribution before the due date of your 2025 tax return, including extensions, otherwise it's subject to an excess contribution penalty.

Because it has been less than 60 days since the date of the December distribution, you can accomplish the the intended Roth conversion by indirectly converting that portion of the December distribution as you suggest.  This will leave you with a net, non-converted distribution of an amount equal to your RMD.

The downside of having to do this is that the Roth IRA has probably increased in value since February, so the amount needed to be distributed to accomplish the return of contribution must include the net income attributable to the amount deposited in February.  That attributable net income will be taxable on your 2025 tax return.

If you do the indirect conversion of a portion of the December distribution, you'll want to make a note in your tax records that the portion deposited into the Roth IRA in February was a failed conversion due to not completing the RMD first.  Because the IRA custodian has no way of knowing if your RMD had been completed (by taking it from some other traditional IRA that you might have), they are going to report that portion on Form 5498 as a conversion.  You want the note in your tax records in case the IRS ever questions the amount converted since the amount actually converted will be half of what is reported on the Form 5498 from the Roth IRA.