RMDs shouldn't cause TT to say I made an excess Roth contribution

[SPQ]

My husband and I are both subject to RMDs.  I still work part-time, with income sufficient to make Roth contributions, which I did directly in 2023, rather than using the 2-step method of contribution to a traditional IRA, then converting it to a Roth.  RMDs are not considered earned income for purposes of the income limits to make a Roth contribution.  Why is Turbo Tax telling me I made an excess contribution to my Roth?  Our other income is well below the income limits, so it seems TT has to be making this statement on the basis of our RMD income.

How do I correct or override TT and handle this on our tax return so as not to set off audit alarms?

[fanfare · Accepted solution]

" RMDs are not considered earned income for purposes of the income limits to make a Roth contribution.  "

RMD is part of AGI and large AGI will reduce or eliminate your allowable contribution to Roth IRA.

For this reason, the Backdoor Roth contribution is used where possible.

You have to recharacterize your Roth contribution to Trad contribution before Tax Day. or before Oct 15 if you make a timely request for extension of time Form 4868

@SPQ 

[SPQ]

@fanfare

Thank you for responding promptly.  Let me make sure I understand this, please.  Is the following a correct summary? 

“RMDs do not count as earned income in terms of eligibility to contribute to a Roth IRA in any given year.  However, if your agi is over IRS-specified limits RMDs do count against your eligibility to contribute directly to a Roth IRA.  

“Therefore, you must have earned income from a W-2, or self-employment income, to be eligible to contribute to a Roth.  Even if you are eligible to contribute, if your agi is over IRS-specified limits, you cannot contribute directly to a Roth, but must use the back-door method (aka two-step method) to contribute to a Roth.  (See IRS Pub 590)"

Thank you!

[fanfare]

I think you've got it now.

if your AGI is over TaxCode-specified limits (total phaseout), you cannot contribute to a Roth, period.

The backdoor Roth uses a conversion to get the money into the Roth.

@SPQ 

The Backdoor Roth Conversion is not mentioned in the IRS publications. Congress has been tempted to make it illegal.

[SPQ]

@fanfare 

Thank you.  It doesn't help those of us not totally proficient with this vocabulary that the two most important words in this distinction both begin with "con," contribute and convert!

Best wishes to you!

[fanfare]

I'm guessing your Traditional IRA is zero balance since you have done this before.

You have an excess so you have to do something about it.

Ask custodian to recharacterize your contribution plus earnings to Trad IRA.

then mark the amount non-deductible.

That's all you can report for this tax period if you act now..

Once that's done, you can do a conversion.

@SPQ 

[SPQ]

@fanfare

Thank you, I'm on it already!