4 Steps to Taking a Roth Conversion After Age 70 1/2

Wednesday, April 29, 2015

By Beverly DeVeny, IRA Technical Expert
Follow Me on Twitter: @BevIRAEdSlott

  1. Take your required minimum distribution (RMD). Roth conversions are treated as rollovers for income tax purposes and your RMD cannot be rolled over. You must take the RMD before doing a Roth IRA conversion.

  2. Do the Roth IRA conversion. The conversion can be done as a 60-day rollover or as a trustee-to-trustee transfer from the IRA to the Roth IRA. In either case, it is reported as a rollover for income tax purposes.

  3. Check to be sure the correct amount left the traditional IRA and the correct amount was deposited into your Roth IRA account. A mistake can happen anywhere in the transaction by the account owner, the financial advisor or their staff, or at the financial institution. The sooner a mistake is discovered, the easier it could be to fix it.

  4. Check the tax reporting done by the traditional IRA custodian and by the Roth IRA custodian to be sure that they are correct. The 1099-R from the IRA custodian must be issued by January 31 of the following year and the IRS Form 5498 must be issued by the Roth IRA custodian by May 31 of the following year. These forms are frequently incorrect and they go to IRS, so check them as soon as you receive them. If you are expecting a form and it does not show up, contact the traditional IRA or Roth IRA custodian to find out where it is.

It is crucial that you take the RMD before doing the Roth conversion. Missing that step means that you end up with an excess contribution, in the amount of the RMD, rolled over to the Roth IRA. The excess contribution is subject to a penalty of 6% per year for every year that it remains in the Roth IRA. The excess contribution can be timely corrected by taking a distribution of the excess contribution by October 15 of the year after the transaction and no penalty will be owed. When it is not timely corrected, the penalty is reported to IRS on Form 5329, which should be filed with your tax return ,but can be filed as a stand-alone return. When Form 5329 is not filed, the statute of limitations does not start to run for the excess contribution transaction and the IRS can assess the 6% penalty, along with a host of other penalties and interest, indefinitely.

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