Reverse conversion of IRA funds to Roth IRA same year as starting RMD.

[sfowjr66]

I retired in May, 2022. In Feb of 2022 I made a $7000 non-deductible contribution to my traditional IRA. A week later I did "backdoor" conversion of the $7000 to my Roth IRA. In November 2022 I took my first RMD (my age is 78) from a separate 401k plan.  I then learned that I was not permitted to make the "backdoor" conversion to the Roth IRA because of taking the RMD.  What can I do now to avoid an annual 6% penalty on the $7000 (plus earnings) that I converted.? Also, my Turbotax 1040 form shows the $7000 converted money as a taxable distribution even though the converted amount came from a non-deductible contribution to the traditional IRA. Of course, I am willing to remove the $7000 from the Roth IRA and count it as part of my RMD for 2023. If I do this, will I no longer face the annual 6% penalty assessed for an "excess contribution" to the Roth IRA?

Thank you.

[fanfare]

You must take your traditional RMD from your traditional IRA first before you do any other distribution from the traditional IRA e.g. conversion. Did you ?

This is an obscure rule that most people don't know about.

Your 401k RMD is not relevant.

-

Form 8606 is an essential component of the "Backdoor Roth".

If your conversion shows taxable, you did not prepare the required Form 8606.

@sfowjr66 

[fanfare]

" In Feb of 2022 I made a $7000 non-deductible contribution to my traditional IRA."

if your traditional IRA(s) combined value at Dec 31 2021 was zero when you did this,

you don't have any problem.

There is no RMD on a zero-value IRA.

@sfowjr66 

[sfowjr66]

Thank you very much for your help and expertise.

WR

[sfowjr66]

I am following up to the earlier question I asked and your response.

Unfortunately, I was not aware of the "obscure" rule.  In February, 2022 I made contribution of $7000 to my traditional IRA.  A week later I converted the $7000 into my Roth IRA leaving a balance in the traditional IRA of zero. (I have been doing this contribution, conversion scheme for many years.)  Schwab sent me 1099-R for the $7000 distribution from the traditional IRA with the box indicating the taxable amount was unknown.

Unfortunately, lacking the knowledge that RMD had to be taken before conversion, I took my 2022 RMD in November 2022.  (I retired in May, 2022).  

I think the February conversion will be viewed by IRA as "excess contribution" so I am trying to determine the right method to remove the $7000 from my Schwab Roth IRA.  Obviously I want to avoid the 6% penalty on the earnings for excess contributions from occurring every year from now on.  

Of note, both IRS and California have given me automatic extension to file my 2022 tax returns until Oct 15, 2023 (based on disaster relief concept) so I have not yet filed my 2022 returns.

I would very much appreciate your additional thoughts about my situation.

Thank you in advance.

[NCperson]

@sfowjr66 - I've re-read this thread.  What is your remaining question? 

@fanfare stated that "if your traditional IRA(s) combined value at Dec 31 2021 was zero when you did this,

you don't have any problem. There is no RMD on a zero-value IRA."

and in deed you stated that your Trad IRA balance on 12/31/21 was zero.  So there is no RMD requirement on this TRAD IRA account. 

From what I read, your RMD was a function of your 401(k) and not your Trad IRA. 

[fanfare]

You can proceed with your backdoor Roth as usual because your 401k is not impacting that.

" my Turbotax 1040 form shows the $7000 converted money as a taxable distribution"

" (I have been doing this contribution, conversion scheme for many years.) "

If you have done this many times I hope it has been a non-taxable event (via Form 8606)

and you would have recognized your mistake this time (taxed) immediately.

@sfowjr66 

[sfowjr66]

Thanks for your response.  Here is what I think accounts for Turbotax calculating that a substantial amount of my $7000 non-deductible  IRA is taxable when converted to my Roth IRA.  The total basis of my traditional IRA on 12/31/21 was zero. In February 2022 I made $7000 non-deductible contribution to my traditional IRA after which I made "backdoor" conversion to my Roth IRA.   But when I retired in May, 2022 I had good sized balances in my workplace 401K.  Some of the 401K money was after-tax deferrals and Roth deferrals. Those amounts I rolled over to my previously established Roth IRA.  But the largest portion of the 401K was pre-tax deferrals and earnings.  That amount was rolled over into a new "rollover" IRA.  Form 8606 asks for total balance of all IRAs on 12/31/21 which was zero.  Form 8606 also asks for total balance of all traditional IRAs on 12/31/22 which was a large amount because that amount includes the 401K money rolled over to the new rollover IRA.  (At the time of the rollovers from the 401K to the rollover IRA I took my total RMD required for 2022.) 

So when I look at worksheet in IRS Publication 590B, the amount of my backdoor conversion of $7000 that is non-taxable includes the total 12/31/22 balance of the "rollover IRA" leading to the result that quite a bit less than the total of the converted $7000 is non-taxable.  

My question: Is it proper for the non-taxable amount of the converted $7000 calculation to include in the denominator the amount rolled over from my 401K to my new rollover IRA in 2022?  Obviously, this gives a different taxable amount from prior years when I only had a traditional IRA that had balance of zero on 12/31 of each year.

Thank you again.

[sfowjr66]

Thanks for your response.  Here is what I think accounts for Turbotax calculating that a substantial amount of my $7000 non-deductible  IRA is taxable when converted to my Roth IRA.  The total basis of my traditional IRA on 12/31/21 was zero. In February 2022 I made $7000 non-deductible contribution to my traditional IRA after which I made "backdoor" conversion to my Roth IRA.   But when I retired in May, 2022 I had good sized balances in my workplace 401K.  Some of the 401K money was after-tax deferrals and Roth deferrals. Those amounts I rolled over to my previously established Roth IRA.  But the largest portion of the 401K was pre-tax deferrals and earnings.  That amount was rolled over into a new "rollover" IRA.  Form 8606 asks for total balance of all IRAs on 12/31/21 which was zero.  Form 8606 also asks for total balance of all traditional IRAs on 12/31/22 which was a large amount because that amount includes the 401K money rolled over to the new rollover IRA.  (At the time of the rollovers from the 401K to the rollover IRA I took my total RMD required for 2022.) 

So when I look at worksheet in IRS Publication 590B, the amount of my backdoor conversion of $7000 that is non-taxable includes the total 12/31/22 balance of the "rollover IRA" leading to the result that quite a bit less than the total of the converted $7000 is non-taxable.  

My question: Is it proper for the non-taxable amount of the converted $7000 calculation to include in the denominator the amount rolled over from my 401K to my new rollover IRA in 2022?  Obviously, this gives a different taxable amount from prior years when I only had a traditional IRA that had balance of zero on 12/31 of each year.

Thank you again.

[fanfare]

once you rollover funds into a Traditional IRA or make a deductible contribution.

the standard "Backdoor Roth" tax free is no longer available to you.

The only way out is to convert the entire traditional IRA  into a Roth IRA.

This is moot since you are retired and if you have no earned income you can't make a non-deductible IRA contribution.

@sfowjr66 

[sfowjr66]

I retired in May, 2022 so I had earned income until May.  Therefore, I thought I could make non-deductible contribution to IRA in 2022.

[fanfare]

what I meant to say is, you won't be able to do it in the future without earned income.

@sfowjr66 

[sfowjr66]

Yes, I understand that.

Thanks again for your help.

Turbotax wants me to pay income tax on the $7000 I contributed to my traditional IRA, then backdoor converted into my Roth IRA.  I think I will simply pay the tax and consider this a lesson learned. 

[fanfare]

You are not allowed to reverse (undo) a conversion, so you have no choice.

@sfowjr66