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IRA Transactions: Detours and Alternate Routes Thumbnail

IRA Transactions: Detours and Alternate Routes

Sometimes we get stuck in traffic, or a highway is closed, and we are forced to find an alternate route. I’m not talking about driving across someone’s front yard or going the wrong way on a one-way street. Think side roads and legal detours. While a main road may be blocked, that might not be the only way to reach your destination. The same holds true with certain IRA transactions. Here are a handful of creative “detours” that retirement account owners may be forced to take in order to reach their intended goal.

IRA Transactions: Detours and Alternate Routes

Backdoor Roth IRA

This is the classic workaround for anyone who makes too much money to contribute to a Roth IRA. Yes, there are contribution income limits which prohibit high earners from contributing directly to a Roth IRA. But these limitations can easily be overcome. High earners can make non-deductible contributions to a traditional IRA and then convert those dollars to a Roth IRA immediately thereafter. (There is no mandatory holding period before the conversion can be done.) Just be aware that the pro-rata rule will apply.

No Liquidity/RMD Aggregation

If an IRA owner holds an illiquid investment in his IRA, that is no excuse to avoid taking the required minimum distribution (RMD). The easiest “alternate route” is to take a distribution from another IRA. Assuming the IRA owner has another IRA, SEP or SIMPLE IRA that contains liquid assets, aggregation rules allow the RMD from the illiquid account to be taken from another IRA. Recognize that not all retirement accounts can be aggregated for RMD purposes. For example, an RMD for a 401(k) cannot be satisfied by taking a distribution from an IRA.

No Liquidity/RMD Conversion

Recently an advisor called and said his client was short by $24 with his IRA RMD. An illiquid investment prevented him from generating the cash to cover the shortfall. Additionally, he had no other IRA from which he could take the shortage from. The first idea was to make a contribution to the IRA, and then turn around and withdraw $24. But the retired IRA owner had no earned income, so a contribution was not allowed. The advisor mentioned that the client wanted to convert the entire IRA to his existing Roth. Ah-ha! A legal detour. Solution: The advisor converted the entire illiquid investment to a Roth. This resulted in a conversion of the remaining RMD of $24. But RMDs are not supposed to be converted. Oops. The $24 was now an excess contribution in the Roth. The existing Roth IRA had plenty of liquid investments. The $24 was then promptly removed from the Roth IRA as an excess contribution withdrawal. RMD satisfied, no penalties, legal workaround.

Estimated Taxes Underpayment

If it is late in the year and you find yourself behind in your estimated tax payments, take a distribution from your IRA and have 100% withheld. Taxes withheld are deemed to be paid in equally over all four quarters.

Taxes Withheld on Plan-to-IRA Rollover 

Speaking of having taxes withheld, sometimes plan participants erroneously request a distribution (as opposed to a direct rollover) from their work plan with the intent of rolling over the dollars within 60 days. When the plan processes the distribution, there is a requirement to withhold 20%. In a situation like this, the account owner can make up the “missing” 20% with dollars from his own savings to complete a full 100% rollover. The 20% withheld will be a credit to the IRS that the taxpayer may be able to recoup at tax time.

Just because the sign says “Dead End” or “Road Closed” does not mean the journey is necessarily over. Legal workarounds exist for many retirement account transactions.

By Andy Ives, CFP®, AIF®
IRA Analyst
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2025, Ed Slott and Company, LLC Reprinted from The Slott Report, 02/24/25, with permission. https://irahelp.com/slottreport/ira-transactions-detours-and-alternate-routes/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. 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. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.