Roth IRA conversion from Traditional Roth Distribution

[hnk2]

We do taxes as married filing jointly. Our income prevents direct contributions to a Roth IRA or a Traditional IRA because of IRS limits. We recently took a distribution from one of our Traditional IRAs, but later found we did not need it. It is well past the 60 day return of distribution window.

My question is whether we can treat this as a Traditional to Roth IRA conversion. We paid taxes on the Traditional IRA distribution; It seems we should then be able to contribute the same amount to the Roth IRA through Form 8606. The money was in cash, so there should not be any appreciation considerations. Also, I understand that the Roth contribution can happen at any time, but that the year it is contributed will be deemed the year the conversion takes place, and starts the 5 year rule.

The instructions for Form 8606 and all the posts I have found on the subject use taxed (often excess) contributions to the Traditional IRA as the source of the conversion money. In our case, I want to use a Traditional IRA distribution instead. Can I do this?

[baldietax]

see

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras#rollovers

How long do I have to roll over a distribution from a retirement plan to an IRA?

You must complete the rollover by the 60th day following the day on which you receive the distribution. You may be eligible for an automatic waiver of the 60-day rollover requirement if a financial institution caused the error and other conditions are met. See Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) and Retirement plans FAQs relating to waivers of the 60-day rollover requirement.

[hnk2]

Thank you for the quick answer. A "Rollover" seems to be defined by the IRS as a tax free event - from IRS https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-...

"When you roll over a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred." 

And certainly 60 days always applies converting from a pretax vehicle like a Traditional IRA/401(k) to another, or a Roth to Roth.

I can't find a direct reference to a back door Roth Conversion time limit on the IRS site, but Morningstar https://www.morningstar.com/personal-finance/key-rules-backdoor-roth-ira-contribution has this:

"The conversion [that is the Trad IRA to Roth IRA] step has no deadline. However, it should be done immediately after the contribution to ensure that the contribution’s gains accrue in the Roth IRA where it could eventually become tax-free."

And I have seen that no time limit elsewhere. This seems to conflict with the earlier IRS 60 day rule as applied to Trad IRA to Roth IRA. Can you clarify? Why is there no 60 day conversion rule for a backdoor Roth Conversion?

[fanfare]

"We recently took a distribution from one of our Traditional IRAs,"

Since you took out the funds in the Traditional IRA, there is nothing for the custodian to work with. and nothing for Form 8606 to work with.

A conversion works on funds that have been contributed and remain in the IRA, not taken out.

@hnk2 

[baldietax · Accepted solution]

@hnk2 this section in the IRS page specifies that a 'conversion' can either be done as a 'rollover' (where the check comes to you, but needs to be deposited into the Roth within 60 days), or a 'transfer' directly between accounts at the same trustee, or between trustees.

How do I convert my traditional IRA to a Roth IRA?

You can convert your traditional IRA to a Roth IRA by:

• Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
• Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
• Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.

The 'conversion step has no deadline' referred to in the Morningstar article is referring to, for backdoor Roth conversions specifically, the time between making the non-deductible contribution to the IRA and then executing a conversion using these methods above; it's not referring to the time gap between taking a distribution and then deciding later it was for a Roth conversion.

As the name implies a 'backdoor' Roth process is a workaround for contribution limits on Roth IRAs for high earners by flowing the money through a zero-balance traditional IRA first, which used to come with concerns about 'how soon' this could be done to be considered legitimate (which I think was clarified in the 2017 TCJA to be a non-issue); but there is no time limit between making a Trad IRA contribution and then deciding to do a Roth conversion whether it's considered 'backdoor' or not - for a 'backdoor' conversion the issue with waiting is the earnings growth in the Trad IRA is taxable whereas it could have been growing tax free in a Roth.

I'm not a CPA but from what you've described I think the answer to your original question is 'no' since more than 60 days have passed since you took the distribution.