Roth IRA conversion via 60-day rollover

[jhbrown42]

I took $22,000 out of my traditional IRA in late December 2022, and put it in a non-retirement (checking) account.  In January I realized I could/should have done a Roth IRA conversion.  The IRS pubs say you can do a 60-day rollover from any retirement plan to any other retirement plan, including a Roth IRA conversion.  But Form 8606 asks "enter the net amount you converted from traditional, SEP, and SIMPLE IRAs to Roth IRAs in 2022".  Can I still put the $22,000 into a Roth in January 2023 and have it count as a conversion happening in 2022?  (I know I have to pay 2022 taxes on the $22,000).  If so, can I have a reference to the pubs backing that up?  Because some financial institutions I've been dealing with (Fidelity, Vanguard) seem to think it is impossible.

[DaveF1006]

To clarify, read this reference in  this Turbo Tax post written by esteemed expert DavidD66. He states that "A Roth conversion is only recognized for the year it occurs".  In this case, you will report this conversion on your 2023 return.

Although, you do have 60  days to make the conversion, the conversion will be reported in the year it was actually completed and not initiated.  

{Edited 1/30/23} 9:06 AM PST} @jhbrown42

[dmertz · Accepted solution]

DaveF1006 is incorrect.  Because the distribution occurred in 2022, depositing the money within 60 days into a Roth IRA as a Roth conversion would be reportable on your 2022 tax return as a Roth conversion.  There is no requirement that the deposit into the Roth IRA be completed before the end of the year.  (The reference to DavidD66's post does not apply.  That post was in response to a question asking if a distribution performed in 2021 could be reported as income on a 2020 tax return.)

The only oddity is that the conversion deposit will appear on the Roth IRA's 2023 Form 5498 rather than a 2022 Form 5498 despite this being a 2022 Roth conversion.  This is not a problem.  The IRS is well aware that indirect Roth conversions might be completed early in the year following the year of the distribution.

Assuming that you complete the Roth conversion, when entering the Form 1099-R that reports the distribution you'll indicate that you moved the money to another retirement account, that you did a combination of rolling over, converting and cashing out, then indicate the amount converted.

[jhbrown42]

Thank you for your answer.  That was what I was hoping for.  But as for the second part of my question, is there anything from the IRS I can reference?  Because I know I will have trouble getting my financial institution to take $22,000 from my checking account into my Roth without them thinking it is a 2022 contribution limited to $7000.

[dmertz]

See Converting From Any Traditional IRA Into a Roth IRA in IRS Pub 590-A:

https://www.irs.gov/publications/p590a#en_US_2021_publink1000230658

Your financial institution should have no trouble accepting this as Roth conversion (technically a conversion contribution, reportable in box 3 of the 2023 Form 5498 that they issue, not in box 1).  You just need to make sure that they understand that this is a conversion contribution, not a regular contribution.  If they have a deposit form for your to fill out, that form should have a way to identify the deposit as a Roth conversion.  For example, the deposit slip that Fidelity provides has a box to mark that the deposit being made is a Roth Conversion, allowing the deposit to be reported in the correct box of Form 5498:

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/deposit-slip.pdf

It's possible that the deposit slip will not even ask the date of the distribution that is being converted.  It's generally your responsibility to see that the 60-day deadline is met, although some custodians do ask for the distribution date and will block the deposit unless the deadline is met (absent a reason that the deadline qualifies for an extension or a waiver).

If your financial institution is a bank, bank front office personnel are notoriously bad an understanding IRA transactions and you may have to educate them on the proper use of their own forms.  Since the distribution was made from a traditional IRA, make sure that they do not try to treat it as a rollover from another Roth IRA.

[jhbrown42]

The situation DavidD66 was answering is different.  In that case, the person wanted to initiate the conversion in 2021 and have it count as as 2020 conversion.  DavidD66 rightly said "A Roth conversion is only recognized for the year it occurs".  In my case, I actually initiated the conversion in the year I want to claim it.

So in the case of a Roth conversion via a 60-day rollover, does it "occur" when the money is withdrawn from the traditional IRA?  Or does it "occur" when the money is put into a Roth (within 60 days).  That was the essence of my question.

And I think the answer is, as dmertz said, when the money is taken out of the traditional IRA.  That's when it will get reported on a 1099-R.  It is the same result as if I did a conversion right into a Roth, immediately withdrew it from the Roth, and then put it back in the Roth within 60 days.

[dmertz]

Your understanding is correct.  If the distribution from the traditional IRA occurred in 2022, you'll have a 2022 Form 1099-R that is reportable as a conversion on your 2022 tax return.

There are two only effects that completing this conversion in 2023 instead of in 2022 would have.  The first is that the 5-year conversion clock will start on January 1, 2023 instead of January 1, 2022. possibly delaying by one year penalty-free access to the converted funds.  Similarly, if this established your first Roth IRA, the date on which the 5-year clock for qualifying your Roth IRAs will start on January 1, 2023 instead of January 1, 2022, possibly delaying by one year tax-free excess to earnings.

[DaveF1006]

I think there is a semantical difference here that it is in a gray area. That would be the best way I can describe this.

I have been reading Publication 590 and in section entitled Converting Any Traditional IRA into a Roth IRA, it doesn't mention any exceptions on what year the conversion must be reported. It states, "you can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. If properly (and timely) rolled over, the 10% additional tax on early distributions won’t apply".  It doesn't mention if the conversion happens between calendar year dates.

The biggest issue in this transaction is not the taxes you will need to pay but the 10% early withdrawal penalty. By stating this is a Roth conversion will eliminate that. Also, because of the wording  offered in pub 590, as a reasonable person, I would conclude that this conversion happened in 2022 even though the actual conversion was in 2023.

My suggestion is to report this in 2022 based on the lack of official guidance from the IRS. if questioned or examined by the IRS, keep a complete transcript of this post plus a copy of Publication 590 so you can based your position on the advice you received from the community and from Publication 590. 

@jhbrown42

[dmertz]

There is no question that the Roth conversion must be reported on the the 2022 tax return because the income resulting from the distribution from the traditional IRA was received in 2022.  The same would be true of a rollover of a traditional IRA distribution and a conversion is defined as a special type of rollover.  Although it's in reference to a distribution which is taxable due to not being rolled over, the same applies to Roth conversions where IRS Pub 590-A states: "These amounts are taxable in the year distributed, even if the 60-day period expires in the next year."  This is how it has always worked since the inception of IRAs in 1975.

What is less apparent is the effect on the two 5-year rules.  However, these are well addressed in the Roth IRA statute and regulations, in particular 26 USC § 408A(d)(3)(F)(i)(II) and 26 CFR § 1.408A-6 Q&A-2.   Note that there are always two parts to a Roth conversion:  a distribution from the traditional IRA and a "conversion contribution" (a particular type of rollover) to the Roth IRA.  In this case, the conversion contribution occurs in 2023 and will be reported on a 2023 Form 5498 and is what the IRS looks to to determine the beginning of the 5-year periods.