Roth Conversion Problem

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  • #8343
    Bruce1950
    Participant

    My BIL, age 63, last January withdrew $5,000 from his TIRA for a short term need, replacing it within the 60 day period required. No problem so far. But then last month, he withdrew $2,000 from his TIRA and a week later, deposited it in his Roth as a conversion. Woops.

    My understanding is that because he violated the once-per-12 month rollover, his second withdrawal will be considered simply a withdrawal and his Roth IRA deposit will be considered a contribution. problem is, BIL and spouse have no earned income this year, so this would be an excess contribution. Correct?

    The remedy, I believe, is to withdraw the $2,000 along with any associated earnings, with the earnings reported as income. Agree?

    The withdrawal must be done by Oct 15 to avoid the 5% tax. Is there any advantage to leaving it in the RIRA until then? If not and he waits till then, in what year must the earnings be declared…2020 or 2021?

    Thanks

    BruceM

    #8344
    Alan S.
    Participant

    Actually Bruce, there is no problem here because a conversion is not subject to the one rollover limitation. In fact, a conversion is a fall back strategy if a person has used up their one 60 day rollover, then realizes he cannot roll a TIRA distribution over to another TIRA. While doing a conversion is still taxable, it preserves the IRA money and upgrades the type of IRA. And for those under 59.5, it also erases the penalty on the distribution that otherwise could not be rolled over.

    Again, the one rollover limit only applies to TIRA to TIRA rollovers, or Roth IRA to Roth IRA rollovers. It does not apply to conversions or rollovers from or to an employer plan.

    #8346
    Kaye Thomas
    Moderator

    I’ll just note one other point. The idea behind allowing people to roll the money back to the IRA from which it came is to deal with the situation where some kind of change in circumstances prevented completion of the planned rollover. The IRS doesn’t approve of using this technique as a way to obtain a short-term loan from an IRA. I haven’t heard of them going after people who do this with modest amounts as mentioned here, but people who present this as an accepted technique are promoting a misconception. Of course, there’s nothing to prevent someone from taking money out, using it for 59 days, then rolling it into a different IRA, with the same effect but without any grounds for objection from the IRS.

    #8374
    Bruce1950
    Participant

    Much thanks. I didn’t realize the second rollover would not count as a rollover if converted. But does this non-rollover withdrawal have to be deposited in the Roth within 60 days? My BIL did so in a week or so, so is not a factor. Is there any time constraint on the rollover deposited into the Roth beginning with the date withdrawn from the TIRA (or retirement plan)?

    BruceM

    #8376
    Kaye Thomas
    Moderator

    Yes, the 60-day rule applies.

    #8393
    Bruce1950
    Participant

    Thanks Kaye

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