IRA to ROTH conversion without paying RMD first

Forum|Forum|4 years ago
July 23, 2021
1 reply
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I misunderstood and converted an IRA to a ROTH in 2021 without paying the IRA RMD first. I did have enough taxes withheld to cover the RMD. My credit union says they cannot reverse the conversion and offer no solution. Is there a solution or do I try to explain to the IRS after I file the 2021 taxes?

macuser_22

Alumni - Champ

@PCM43 wrote:

I misunderstood and converted an IRA to a ROTH in 2021 without paying the IRA RMD first. I did have enough taxes withheld to cover the RMD. My credit union says they cannot reverse the conversion and offer no solution. Is there a solution or do I try to explain to the IRS after I file the 2021 taxes?

An RMD is not eligible for a rollover or conversion and the RMD must be satisfied before taking out more then the RMD which could be converted, so you have an "excess contribution in the Roth that must be removed as a "return of contribution plus earnings" before the 2021 due date which is April 15, 2022.

The withholding is immaterial - it does not pay the tax, yiu do that when yiu file 2021 tax and if not enough withheld then you owe additional. You still must pay the tax on the IRA distribution.

The credit union cannot "undo a conversion" however since the conversion was not permitted by law it becomes an excess contribution and not a conversion, which they are required by law to return to you plus any earnings attributed to the excess. They should issue a 2021 1099-R with a box 7 code "J8" if returned in 2021 or code "JP" if returned in 2020 before the due date. Only the earnings (if any) will be taxable.

Credit union personal often do not know how to handle this so you might need to escalate to upper management.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Critter-3

Level 15

Simplest solution is to take out the RMD now to satisfy the requirement. The IRS doesn't care when the distribution takes place during the year as long as it happens and it is reported on the return and enough was distributed overall and NOT converted. The amount withheld that was not available for the conversion is considered part of the RMD.

macuser_22

Alumni - Champ

The tax law says that the RMD must be satisfied BEFORE any additional distributions are taken. You "might" get away with it but if the IRS checks then the penalty is 50% of the amount of the RMD. (Would you want to risk it?)

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**