Made a Mistake: Made a Roth Conversion earlier in 2022 Before Taking the RMD - What Should I do?

[Opus 17]

---

@fanfare wrote:

Sometimes your Roth IRA grows so fast that the 6% excess contribution penalty can be easily absorbed.

But it appears that those days may be over.

---

The penalty for missing the RMD is 50% of the missed RMD.  That's on top of the 6% penalty for excess contributions, which the taxpayer has to pay every year until the excess contribution is removed.

[Jack-A-Lope]

@Opus 17, @dmertz -- Thanks so much for the responses.

The Roth conversion was done in March, and there would definitely be a loss if the excess contribution was returned, so there won't be any additional  tax involved, correct?

Optional Step 1a is irrelevant to me (no more work), but thanks for laying it out.

Optional Step 2 is what I would do, if I do it. All the money is with Vanguard

If I understand it, doing the excess contribution step is fairly easy. I would then do a new rollover with the $50,000 and I would basically be in the same place tax wise, except now I have the RMD and Roth conversion in the correct calendar order. I don't think this will have much of a financial impact, correct? If I do this, will I have to fill out form 5329?

One concern is if Vanguard will process this correctly and the correct 1099-R form will be generated. From this conversation, it sounds like the 1099-R form would be almost the some if I didn't do this, correct?

Regardless, whether I did or didn't process the excess contribution, I am making a good faith effort to correct it which seems to be the standard for any waiver of excess tax on form 5329.

[dmertz]

"The Roth conversion was done in March, and there would definitely be a loss if the excess contribution was returned, so there won't be any additional  tax involved, correct?"

Correct.  Be aware that the gain or loss is calculated with respect to the entire Roth IRA account.

"If I understand it, doing the excess contribution step is fairly easy. I would then do a new rollover with the $50,000 and I would basically be in the same place tax wise, except now I have the RMD and Roth conversion in the correct calendar order. I don't think this will have much of a financial impact, correct? If I do this, will I have to fill out form 5329?"

Correct, no real financial impact.  With the corrective distribution made from the Roth IRA, there is nothing to report on Form 5329.  If the amount originally moved to the Roth IRA as an intended Roth conversion was more than your RMD, the RMD has been satisfied.  The only reason you would have Form 5329 with regard to all of this is if by the due date of your 2022 tax return, including extensions, you fail to correct the amount now in the Roth IRA which must be reported as an excess contribution.  If corrected, you won't have an excess contribution to report on Form 5329.

"One concern is if Vanguard will process this correctly and the correct 1099-R form will be generated. From this conversation, it sounds like the 1099-R form would be almost the some if I didn't do this, correct?"

The code-7 Form 1099-R will total the distributions from the traditional IRA.  There is nothing special about that.  The return of contribution must be requested as such, not a regular distribution, so that the Form 1099-R reporting this corrective distribution will have codes J and 8 if done in 2022 or codes J and P if done in 2023 before the due date of your 2022 tax return, including extensions.

[Mike9241]

@Jack-A-Lope 

this is from the following webpage

https://www.irahelp.com/forum-post/26501-roth-conversion-rmd#:~:text=If%20so%2C%20your%20RMD%20for%2... 

The distribution is deemed to satisfy the RMD, so your RMD has been completed. However, the RMD amount was not eligible for rollover and became an excess regular Roth contribution. Explain to the Roth custodian what happened and request a return of the excess amount with allocated earnings. The earnings will be taxable, but will be small so this is not costly. However, it is messy to report on your tax return because what you report will vary from the 1099R for the conversion. You will only report the allowable amount of the conversion on Form 8606, so the total taxable amount will be your allowed conversion amount (the excess converted over the RMD) plus the excess contribution amount (really the RMD) plus the earnings on the excess amount returned to you.
You can satisfy your total RMD from just one account, but you must complete that before converting any additional amounts. In other words, the total RMD must be withdrawn from any account you wish, and afterwards you can convert more from any account you wish.

[Jimbert]

"... request a return of the excess amount ..."

Does that mean the "return" will go back into the IRA that it originally came from?

The conversion in my case was simply a transfer of stocks from one IRA to one Roth. Do the same stocks have to be returned or can it just be an equivalent dollar amount?

[Opus 17]

---

@Jimbert wrote:

"... request a return of the excess amount ..."

Does that mean the "return" will go back into the IRA that it originally came from?

The conversion in my case was simply a transfer of stocks from one IRA to one Roth. Do the same stocks have to be returned or can it just be an equivalent dollar amount?

---

It would really help to post a new conversation since we don't know if your facts are the same as this 3 year old conversation.

Let's recap.

Suppose you convert your entire traditional IRA to a Roth IRA before taking your RMD from the trad IRA (the situation of the original question).  Because you must take the RMD first, this is a failed conversion.  Let's make some imaginary numbers.  The IRA value was $50,000 and your RMD amount was $4000.  That means, the situation will be treated as if you did the following:

1. You made a regular $4000 withdrawal.

2. You converted $46,000.

3. You contributed $4000 into the Roth IRA.  

That failed conversion (because the RMD must come out first) is treated as if it was a regular contribution.  Unless you have income from employment, you are not allowed to make Roth IRA contributions, so it is an excess contribution.

Therefore, it must be removed as an "excess contribution".  That means cash coming to you, not going back to the IRA.  The whole point of an RMD is that you must withdraw your account over time and pay taxes on it, you can't keep it in the IRA and never spend it.  That means that you should have withdrawn the $4000 and paid tax on it before converting the other $46,000 (using my fake example, substitute your own numbers of course).  So the correction process is to remove the $4000 of cash and pay tax on it.

So in fact, you pay tax in two ways on different parts of the transaction.

1. When reporting the conversion, enter the 1099-R, and say that $46,000 was converted and $4000 was kept out.  You will pay tax on the entire $50,000 withdrawal according to the usual rules.

2. Enter the 1099-R for the withdrawal of excess from the Roth IRA.  The conversion portion is not taxable, but the net attributed earnings are taxable. 

[dmertz]

A return of contribution (an RMD impermissibly converted is a failed conversion and therefore constitutes an ordinary contribution to the Roth IRA) is paid to the participant, not returned to the traditional IRA.  The excess is the dollar value equal to the amount of the RMD that had been impermissibly deposited into the Roth IRA.  A return of the excess before the due date of the tax return would be the distribution of that dollar value plus the net attributable income calculated based on the investment performance of the entire Roth IRA.  The fact that a Roth conversion was done in-kind is irrelevant.  You can think of the conversion as having been done by selling the shares in the traditional IRA, conversing the cash, then in the Roth IRA repurchasing the shares at the same share price.