Reply To: Reporting redeposited 2020 RMD

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Kaye Thomas

At this point the story does and does not make sense. It appears much has gone wrong here. I need to stress that the following is not legal advice, but merely thoughts based on imperfect knowledge of your situation. You should have a qualified tax professional review the situation and determine what you need to do.

At the time you took the money from your traditional IRA, you thought this distribution was needed to meet RMD requirements. But you had Fidelity put the money in a Roth IRA, which isn’t allowed for RMD distributions. You’re allowed to transfer money from a traditional IRA to a Roth, but only after you’ve taken your RMD. The RMD itself cannot be transferred to another IRA: not to a traditional IRA, and not to a Roth.

At that point, you had a valid RMD but not a valid contribution to the Roth. You would have had to remove the money from the Roth to prevent what we call an excess contribution, which incurs a penalty if not corrected. But then Congress changed the law, eliminating the need to take RMD for 2020. Magically, the money coming out of the traditional IRA became eligible for transfer to a Roth. You now had a perfectly good Roth conversion. This is a taxable event, but not improper, so it doesn’t incur a penalty.

Then, however, hearing that RMD were not required for 2020, you believed you could avoid paying tax on this amount by moving it back to the traditional IRA. This would have been permissible if you had simply taken the money out of the traditional IRA, putting it in a regular investment account or bank account. In that case, you could have returned the money to the traditional IRA and paid no tax. Unfortunately, due to a 2017 change in the law, you aren’t allowed to move money back to a traditional IRA after moving it to a Roth.

This means you’ve made an excess contribution to your traditional IRA, which will incur penalties unless corrected. The simplest remedy is to take the money out of the traditional IRA and pay tax on it. Less simple, but more favorable, would be a return of the money to the Roth, which I believe may be permissible under the “recharacterization” rule, which still exists even though it can no longer be used to undo a Roth conversion. You would have to pay tax on the $70,000, but you would not pay excess contribution penalties, and you would get to keep the money in a tax-favored retirement account. Still more complicated would be to figure out some way to obtain relief from the IRS (perhaps through the taxpayer advocate) allowing you to keep the money in the traditional IRA without paying tax on it and without incurring any penalties. I suspect this kind of relief isn’t available, and the best you’ll be able to do is move the money back to the Roth, so you have a permissible but taxable Roth conversion.

I suggest you start by conveying all this to Fidelity and see if they have someone knowledgeable to comment on it from their end. Then take it to a qualified tax professional to see what they think.