If you are at retirement age, you might be at a high risk for excess contributions due to rollover mistakes. This is because of the rule that says that the required minimum distribution (RMD) for the year cannot be rolled over. The RMD for the IRA must be taken before any of the funds in the IRA are eligible for rollover. For example, an RMD must be taken before doing a Roth IRA conversion.
If you mistakenly roll over an RMD, you will end up with an excess contribution.
Very often, many people think they can fix the problem by simply taking a distribution from the IRA that received the failed rollover. Not so fast! It’s not that easy. The RMD was distributed. That part went fine. However, because the RMD should not have been rolled over, it is considered an excess contribution and must be fixed as an excess contribution.
Sometimes the failed rollover is not due to a mistake on your part. Sometimes the mistake may be the fault of the plan administrator handling a rollover from a company plan to your IRA. If ineligible dollars are included in the amount rolled over to the IRA, an excess contribution to the IRA is the result.
Roth IRA conversions are considered rollovers. If you mistakenly include your RMD in a conversion instead of taking it first, you will end up with an excess contribution in your Roth IRA.
Correcting an RMD That Becomes an Excess Contribution
If you have mistakenly rolled over your RMD, do not panic. This is a mistake that can be fixed without penalty if you act promptly. If you correct the excess contribution, by removing it, plus net income attributable, by October 15 of the year following the year of the contribution, you can avoid the 6% excess contribution penalty.
Example: Carla, age 75, has not taken her 2024 RMD of $9,000. She rolls over her entire IRA balance to a new IRA. Carla’s RMD of $9,000 is considered an excess contribution in the receiving IRA. This problem cannot be fixed by Carla simply taking a distribution of $9,000 from the new IRA. She will have to correct the excess contribution. If Carla removes the $9,000, plus the net income attributable as a corrective withdrawal by October 15, 2025, she will avoid the 6% penalty that applies to excess contributions.
By Sarah Brenner, JD
Director of Retirement Education
Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 2024, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Content posted in Ed Slott’s IRA Corner was developed and produced by Ed Slott & Co. to provide information on a topic that may be of interest. Ed Slott and Ed Slott & Co. are not affiliated with Ethos Capital Management, Inc. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The tax information provided is general in nature and should not be construed as legal or tax advice. Information is derived from sources deemed to be reliable. Always consult an attorney or tax professional regarding your specific legal, or tax situation. Tax rules and regulations are subject to change at any time. Ethos Capital Management, Inc. is a registered investment adviser. The firm only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
