converted from traditional IRA to Roth with no salaried income

[starfisht]

I may have made a mistake. This year I have converted about $20K from my traditional IRA to my Roth. My income is from investments and SS, no salaried income. I knew that I couldn’t make a normal contribution to any IRA but I thought that conversion was ok. Am I in trouble?

[VolvoGirl]

That's ok.  You can always do a conversion.  You only need earned income to make a new contribution.  The conversion will be taxable.

[starfisht]

Thank you so much volvogirl. One more question. In 2021 I need to take the minimum required distribution from the traditional IRA. would like to make another conversion. Does a transfer from the traditional IRA to the Roth satisfy that? If not then do I have to complete the MRD before I can do a conversion?

[dmertz · Accepted solution]

An RMD cannot be converted to Roth because an RMD is ineligible for rollover and the tax code defines a Roth conversion as a taxable rollover.  Also, the first distributions from your traditional IRA in 2021 are considered to be the RMD for 2021, so until you have satisfied the RMD for that traditional IRA account, no conversions to Roth from that account are permitted.  The RMD must be satisfied first.

[fanfare]

If you failed to take the RMD amount first, just take the RMD.

If the balance in the IRA is too low, you used to be able to recharacterize the Roth Conversion back

into the IRA and then distribute it.

I wonder if there is any other solution under the new rules.

[dmertz]

An attempted Roth conversion of an RMD is a distribution from the traditional IRA and a failed conversion.  As a failed conversion, it's an excess contribution to the Roth IRA to the extent that it exceeds the amount eligible to be deposited as a regular Roth IRA contribution for the year.  The excess contribution is subject to the normal excess contribution penalties and is corrected by means of a return of contribution before the due date of the tax return for the year in which the failed Roth conversion deposit was made or a regular distribution if done after the due date of that tax return.

Recharacterization was never an option to correct a Roth conversion of an RMD since the RMD was a distribution from the traditional IRA not eligible to be returned to the traditional IRA.  The only legal corrective action is the one I described in the preceding paragraph, although I don't doubt that people may have done recharacterizations for this, mistakenly thinking that it was a legitimate corrective action.

[Hal_Al]

The coronavirus bill, which passed 3/27/20, includes a measure that waives  RMDs from 401(k) plans, IRAs and other retirement accounts for 2020.

This appears to allow a Roth conversion, even if if the RMD has not been met.  Can anyone confirm this?

Reference:

https://www.forbes.com/sites/ashleaebeling/2020/03/27/congress-suspends-required-minimum-distributio...

[dmertz]

There are no RMDs for 2020, so there is no RMD to meet prior to doing a rollover (including Roth conversion) of any distribution.  People continue refer to the amount that would have been their RMD for 2020 as their 2020 RMD, but it's not a required distribution, so there is no such thing as a 2020 RMD.

[mmttxcomm]

My broker rejected my request to withdraw my mistakenly converted RMD into my Roth Ira as "excess contribution". They say I must take it as a distribution.

Is the 1099 form produced by a broker when you withdraw an excess contribution via conversion  to a Roth IRA  the same as the one for a distribution from the same Roth ira?

Can anybody explain the different consequences, if any,

[DanaB27]

No, they are different.

If you make an excess contribution you have to withdraw the excess contribution plus the earnings by the due date of your 2022 tax return to avoid the 6% excess contribution penalty. For this withdrawal, you would get Form 1099-R with codes P and J in box 7 and it would have to be reported on your 2022 tax return. Only the earnings will be taxable.

If you take a regular distribution then your Form 1099-R can have the codes Q or T (since you seem to be over 59 1/2) in box 7 and you would report it on your 2023 return. A Qualified Distributions distribution won't be taxable. Furthermore, you can withdraw contributions you made to your Roth IRA anytime, tax- and penalty-free. 

@mmttxcomm

[dmertz]

Your broker is not serving you properly.

A conversion of an RMD is a "failed conversion" that reverts to being a regular contribution.  What became a regular contribution for 2022 is eligible to be returned before the due date of your 2022 tax return to avoid the 6% excess-contribution penalty for 2022 that would otherwise apply.

If you take a regular distribution instead of a return of contribution distribution, that will correct the excess for 2023 but you'll still have a 6% penalty on the excess for 2022.