Home Made Roth Conversion?

[garyt]

So I'm over 59 1/2 and still working. .Could I in theory take money from my Traditional IRA, pay the taxes and then put that money in as a Roth IRA contribution? Sort of a home made conversion?

 

[exnavynuke]

What you're talking about is doing a Roth conversion and yes, you can do that. Many people here do Roth conversions. It's a "conversion" not a "contribution" though.

 

[exnavynuke]

How to Convert to a Roth IRA - Rollover Rules | RothIRA.com

This explains the overall process.

 

[ERD50]

What would be the advantage of your "Home Made" method? Also, you can covert as much as you want in any year through the normal process, but for your method, you can only do as much as you are allowed to contribute to the Roth (~ $6500 for many, and you need earned income at that level).

I currently contribute the max for both myself and DW, using her > $13,000 annual W2 income ( we can 'share' that income - or at least that's what I'm doing - I'm pretty sure that's correct). I'm also doing conversions up the 15% bracket.

-ERD50

 

[NW-Bound]

A Roth contribution has a limit, and also cannot be higher than the earned income. A Roth conversion does not have these limitations, and can be as high as one's willing to pay taxes. This means a retiree can do only conversion and not contribution.

Can the OP withdraw money from the IRA, then put it back into a Roth account and say that it is really conversion and not contribution?

He may be able to, but why make it more complicated compared to a direct transfer from IRA to Roth?

 

[pb4uski]

So I'm over 59 1/2 and still working. .Could I in theory take money from my Traditional IRA, pay the taxes and then put that money in as a Roth IRA contribution? Sort of a home made conversion?

You would be better off to do a Roth conversion for the same amount... you transfer money from your IRA to your Roth account... the amount transferred is a taxable event just like an IRA withdrawal... the benefit is that you can do any amount on a conversion but contributions are limited to the greater of earned income or $6,500.

So you can convert as much as you want as long as you are willing to pay the tax. Many of us here do Roth conversions between retiring and when SS or pensions start while we are in a low tax bracket. I have done over $200k of conversions over the last 4 years and paid less than $17k in federal tax on those conversions.

 

[garyt]

What would be the advantage of your "Home Made" method? Also, you can covert as much as you want in any year through the normal process, but for your method, you can only do as much as you are allowed to contribute to the Roth (~ $6500 for many, and you need earned income at that level).

I currently contribute the max for both myself and DW, using her > $13,000 annual W2 income ( we can 'share' that income - or at least that's what I'm doing - I'm pretty sure that's correct). I'm also doing conversions up the 15% bracket.

-ERD50

Not sure that there's any advantage other than I think it would be easier.

 

[NW-Bound]

I have Roth and IRA accounts with Schwab. I can transfer stocks, MFs, and cash from IRA to Roth with just a mouse click, and do not even have to sell them to go to cash. This is called "transfer in kind". I do not need to call and talk to anybody. Later, they send me a 1099 form for me to pay taxes.

I have not had a need to reconvert, so I do not know if I can do that online without involving a service rep.

 

[ERD50]

Not sure that there's any advantage other than I think it would be easier.

But if you can do a Roth contribution (you have earned income, and the amount does not exceed the max), then why take money out of the IRA, and pay taxes, to do it? Do you not have the $6500 (or $13,000 if you have a spouse) in money that doesn't incur added taxes?

-ERD50

 

[zinger1457]

I have Roth and IRA accounts with Schwab. I can transfer stocks, MFs, and cash from IRA to Roth with just a mouse click, and do not even have to sell them to go to cash. This is called "transfer in kind". I do not need to call and talk to anybody. Later, they send me a 1099 form for me to pay taxes.

I'll probably be looking at starting ROTH conversions this year. Since I already have a Schwab brokerage and checking account I'll probably stick with them. Do you have to pay the estimated taxes due on the conversion when the conversion occurs or do you wait until the end of the year when you file your taxes to balance it all out?

 

[devans0]

I'll probably be looking at starting ROTH conversions this year. Since I already have a Schwab brokerage and checking account I'll probably stick with them. Do you have to pay the estimated taxes due on the conversion when the conversion occurs or do you wait until the end of the year when you file your taxes to balance it all out?

i'm retired but still new at this. I pay estimated quarterly taxes, and pay as I incur the taxes. Check IRS for this, as there are date rules for quarters and penalties for underpayment.

 

[garyt]

But if you can do a Roth contribution (you have earned income, and the amount does not exceed the max), then why take money out of the IRA, and pay taxes, to do it? Do you not have the $6500 (or $13,000 if you have a spouse) in money that doesn't incur added taxes?

-ERD50

I max out my 401K and that doesn't leave enough left to also put $13,000 in my Roth. We usually put our tax refund ($1500) and maybe another $1K in our Roth each year.
Now that I think about it, I guess I could cancel my 401K (no match) and just put that money into a Roth. The loss of tax break on the 401K would be the same as paying taxes on the money I take from the IRA.

 

[NW-Bound]

I'll probably be looking at starting ROTH conversions this year. Since I already have a Schwab brokerage and checking account I'll probably stick with them. Do you have to pay the estimated taxes due on the conversion when the conversion occurs or do you wait until the end of the year when you file your taxes to balance it all out?

Schwab provides two ways to do this online via their menu. If transferring cash, it provides a choice of withholding tax or not. If transferring "in-kind" which I always did, I do not recall seeing the tax withholding option. I did Roth conversion several times, and always settled the tax at filing. It could be due to my tax situation, but I never have a problem with not doing estimated tax.

If taxes are due at the time of the conversion, then I always did mine late in December which is not too far from tax filing time. The 1099 does not have anything about the date, so how does the IRS know, or can I prove, when the conversion takes place? And not just for conversion, but the same problem applies when one takes out money to spend. Hmm, how does that work?

 

[pb4uski]

Not sure that there's any advantage other than I think it would be easier.

I don't see that... a conversion is a single transaction while your home remedy is too and the end result is identical.

 

[pb4uski]

I max out my 401K and that doesn't leave enough left to also put $13,000 in my Roth. We usually put our tax refund ($1500) and maybe another $1K in our Roth each year.
Now that I think about it, I guess I could cancel my 401K (no match) and just put that money into a Roth. The loss of tax break on the 401K would be the same as paying taxes on the money I take from the IRA.

Yes... same end result.

 

[pb4uski]

Schwab provides two ways to do this online via their menu. If transferring cash, it provides a choice of withholding tax or not. If transferring "in-kind" which I always did, I do not recall seeing the tax withholding option. I did Roth conversion several times, and always settled the tax at filing. It could be due to my tax situation, but I never have a problem with not doing estimated tax.

If taxes are due at the time of the conversion, then I always did mine late in December which is not too far from tax filing time. The 1099 does not have anything about the date, so how does the IRS know, or can I prove, when the conversion takes place? And not just for conversion, but the same problem applies when one takes out money to spend. Hmm, how does that work?

If your tax payments are lumpy, you'll need to do a Form 2210 to demonstrate that you paid your taxes as your tax liability was incurred... otherwise you are subject to underpayment penalties/interest. If you don't do the form they will assume that your income was over the course of the year and send you a bill and then it'll be up to you to do the 2210 and prove them wrong.

As long as your tax payments to date for each quarter exceed your year to date tax liability you are all set... just be aware that the quarters that they define for this purpose are not calendar quarter ends but YTD through 3/31, 5/31, 8/31 and 12/31.

 

[NW-Bound]

Thanks.

I did not make any estimated tax for 2016. All the IRA movements happened in the last two weeks of the year. I have done my taxes, saw what I had to pay, and put it aside. Will have to check into this Form 2210.

 

[RunningBum]

One advantage to doing the one-step conversion is that if you later find some reason you regret doing it, you can back it out with a recharacterization. I don't think you can do this with a contribution.

 

[NW-Bound]

I fired up TaxAct to investigate my estimated tax, or rather lack of it, scenario. What do you know, TaxAct says I owe a little bit of penalty. After initially spending time to enter in all my stock trades and dividends, I got so tired of it and thought I would come back to examine the result a bit closer. Hence, I did not notice this penalty earlier. One thing about using a tax program is that I may not appreciate all the things that go on behind the scene.

OK, so where's the Form 2210? Yes, it is here. TaxAct filled it out for me, and put all of my investment incomes, plus IRA withdrawal at the last quarter, and that resulted in minimal penalty. However, that was not true as I had some income throughout the year. Why did it not distribute at least my stock trades throughout the year, as I already entered in the dates of these transactions for Schedule D (Capital Gains and Losses)? Lazy programmers?

I used the Quicken's income report feature to bracket the various date ranges to get the dividends in each quarter. It also told me about cap gain/loss, but Form 2210 wanted a break down of long and short-term cap gains. Fine. I had to go back to TaxAct to look at what I entered in, wrote the numbers down for each trade, and added them up myself for each quarter.

When that was all done, maybe one hour of work, the result was...

... the penalty was unchanged. What the heck?

It turned out that the income from my after-tax account was small enough that it got cancelled out by the standard deduction and exemption ($20,500) that was also spread out for each quarter. How about that for fairness? Hence, the small penalty was only for that year-end IRA distribution that I did not have taxes withheld on.

Learn something everyday. And by the way, I recently dug into the tax code, and saw why I still carried more than $1K worth of foreign tax credit from previous years, yet could take the one incurred in 2016. I thought TaxAct messed up, but no, it was due to peculiarities in the tax codes.

It would be hard to do this all by hand. One could go insane.

 

[zinger1457]

I fired up TaxAct to investigate my estimated tax, or rather lack of it, scenario. What do you know, TaxAct says I owe a little bit of penalty.

Would the IRS 'safe harbor' rules apply in your case? If the taxes you had withheld in 2016 is at least 100% of taxes you paid in 2015 then you aren't required to pay estimated taxes if your income should suddenly increase. At least that's how I read the rule, I've never had to use it.

 

[NW-Bound]

The penalty was because I had no stinkin' tax withheld. None.