Avoiding a Common Roth Conversion RMD Error

A particular error is common in the Roth conversion arena and you need to be aware of it so you can avoid it. The following information applies to those clients who do not have other IRAs from which an RMD may be satisfied.

If an IRA owner is required to take an RMD, the RMD must be taken before the funds may be

converted to a Roth. Since this is a common mistake, it is especially important to highlight this RMD error issue in light off the large number of IRA owners out there who believe their taxes are going up and want to convert to a Roth.

IRA owners are not permitted to rollover an RMD into another retirement plan, thus, RMD amounts may not be converted to a Roth. The result of failing to satisfy an RMD before converting the IRA to a Roth is that the IRS will not treat or tax the event as a conversion. The IRS will treat the minimum amount that was wrongly converted as a taxable distribution and a tax year regular contribution to the Roth.

Correcting this type of violation is not impossible but it can be very complicated and costly. A possible solution, albeit a highly simplified version, is that the client may remove the amount as an excess contribution along with any net income attributable. It is imperative for a client to immediately consult their personal tax professional to try and come up with a solution based on their particular circumstance.