My first Roth conversion - advice

[Humbooster]

I have left my 401K with the company plan although I retired last year. I did this because the annual fee is very low and it just seemed easier to leave everything as it is. The issue is that when it comes to Roth conversions, everything involves paperwork. I had to call Vanguard, tell them how much to transfer, they then mailed me the paperwork, I filled it in and mailed it back to them. The process took a couple of weeks before the money was finally in place. I hope that your company has a better process in place.
I did a small conversion earlier in the year to get the Roth set up and am still trying to get the second one completed with all the additional mail associated with the holidays.

[gauss]

Are you sure that you want to convert the entire balance in a single tax year? In general, this may bump you into a much higher tax-bracket.

My strategy is to Roth convert a portion each year up to the limit of a particular tax bracket.

Hopefully this has been discussed with your CPA since you are using one.

-gauss

p.s. The year of my first Roth conversion, I just converted a small amount. This was to ensure that I understood the entire process and had no surprises. In subsequent years I was then able to somewhat confidently increase the amounts of my conversions after having been through the whole process including the associated tax return.

[ER2B]

Quote:

Originally Posted by Animorph I'd be a little worried about the taxes. The IRS wants to see estimated taxes paid in equal quarterly installments or paid as due each quarter. So you can pay your Roth conversion taxes as one fourth-quarter estimated tax payment, with the usual January deadline. But then you'll have to divide your income and tax payments into quarterly slices and show the IRS how you paid enough taxes to cover your tax liability for each quarter. I think I've done that twice, but it adds a day to my tax return calculations. I'm pretty sure if you ignore the estimated tax payment and just pay what you owe in April then you will also be paying an under-withholding penalty or interest. One of those things that complicates retirement. The beauty of withholding taxes from a tIRA withdrawal is that it counts as if it was paid equally throughout the year. So withholding enough taxes from your conversion would cover you just fine, and you wouldn't have to worry about quarterly income and taxes. Since you're talking to Vanguard already, see if you can withhold the taxes and then make up the loss with a transfer from a taxable account into the Roth for the same amount. I haven't tried that, but it seems possible. Next year you'll probably find it much simpler to estimate your taxes, including the Roth conversion, and pay estimated taxes in equal quarterly payments.

"Since you're talking to Vanguard already, see if you can withhold the taxes and then make up the loss with a transfer from a taxable account into the Roth for the same amount."

I thought transfers can only be done from a TIRA or 401K.

[Midpack]

Quote:

Originally Posted by Animorph I'd be a little worried about the taxes. The IRS wants to see estimated taxes paid in equal quarterly installments or paid as due each quarter. So you can pay your Roth conversion taxes as one fourth-quarter estimated tax payment, with the usual January deadline. But then you'll have to divide your income and tax payments into quarterly slices and show the IRS how you paid enough taxes to cover your tax liability for each quarter. I think I've done that twice, but it adds a day to my tax return calculations. I'm pretty sure if you ignore the estimated tax payment and just pay what you owe in April then you will also be paying an under-withholding penalty or interest. One of those things that complicates retirement. The beauty of withholding taxes from a tIRA withdrawal is that it counts as if it was paid equally throughout the year. So withholding enough taxes from your conversion would cover you just fine, and you wouldn't have to worry about quarterly income and taxes. I don’t believe there’s any penalty of you pay taxes to match quarterly income when it’s uneven (e.g. making a one time conversion late in the year, estimated payment in Jan). But waiting until April would result in a penalty as you point out. Since you're talking to Vanguard already, see if you can withhold the taxes and then make up the loss with a transfer from a taxable account into the Roth for the same amount. I haven't tried that, but it seems possible. Next year you'll probably find it much simpler to estimate your taxes, including the Roth conversion, and pay estimated taxes in equal quarterly payments.

All true but if you use TurboTax it will do the Form 2210 for you, makes it very easy though you do have to enter each quarters income.

And as for the strikeout, the OP already said she does NOT want to withhold so she can pay taxes from taxable or other sources, same as I’m doing. Preferred if you’re trying to preserve tax free or tax sheltered.

[YakGrl]

Quote:

Originally Posted by Humbooster I have left my 401K with the company plan although I retired last year. I did this because the annual fee is very low and it just seemed easier to leave everything as it is. The issue is that when it comes to Roth conversions, everything involves paperwork. I had to call Vanguard, tell them how much to transfer, they then mailed me the paperwork, I filled it in and mailed it back to them. The process took a couple of weeks before the money was finally in place. I hope that your company has a better process in place. I did a small conversion earlier in the year to get the Roth set up and am still trying to get the second one completed with all the additional mail associated with the holidays.

That is a concern that the 401k rules may be more complicated with withdrawing/conversion requirements. I guess I will find out what the rules are with this conversion attempt. Like you I have left my account this year as a 401k and haven't rolled it into a IRA since I have been very happy with the company plan expenses and options.

[YakGrl]

Quote:

Originally Posted by gauss Are you sure that you want to convert the entire balance in a single tax year? In general, this may bump you into a much higher tax-bracket. My strategy is to Roth convert a portion each year up to the limit of a particular tax bracket. Hopefully this has been discussed with your CPA since you are using one. -gauss p.s. The year of my first Roth conversion, I just converted a small amount. This was to ensure that I understood the entire process and had no surprises. In subsequent years I was then able to somewhat confidently increase the amounts of my conversions after having been through the whole process including the associated tax return.

I am not planning to convert the whole balance as that would be a huge tax hit. I am only planning a small conversion amount to help to even out taxes owed and increase Roth funds. One of the benefits of this first small conversion will be learning more of the rules without a huge risk.

[PatrickA5]

I've done plenty of VG Traditional IRA conversions to VG Roth IRAs. They are simple. But, it appears you're trying to convert a 401K to a Roth IRA. Never tried to do that. You probably are wise to get on the phone with VG and have them step you through the process.

[Animorph]

Quote:

Originally Posted by ER2B "Since you're talking to Vanguard already, see if you can withhold the taxes and then make up the loss with a transfer from a taxable account into the Roth for the same amount." I thought transfers can only be done from a TIRA or 401K.

My thought here was that you can just withdraw from any tIRA by having them write you a check, which you can then deposit into a Roth account within 60 days. So, it seems like you could withdraw from the tIRA, have taxes withheld from that, but then deposit the remainder plus your own check for the missing tax withholding. The net is you converted the full amount from the tIRA to the Roth, but paid taxes by withholding instead of worrying about paying estimated taxes or penalties.

That answers Midpack too. The taxes are paid by withholding, but replaced for the conversion by taxable account funds.

[YakGrl]

I contacted Vanguard today, and with the 401K plan rules I need to fill out paperwork to request the conversion. They have mailed the paperwork to me. We will see if I can get this completed by end of year or not. I would like to get it done, but luckily it isn't critical to do so. This has convinced me that it will probably be best to roll my 401k into an IRA to get out of some of the plan rules. I will look to do that after the end of the year. Thank you all for your advice!

[pb4uski]

Quote:

Originally Posted by YakGrl .... This has convinced me that it will probably be best to roll my 401k into an IRA to get out of some of the plan rules. I will look to do that after the end of the year. ...

An advantage to having a tIRA that I hadn't thought of... since I have both a tIRA and Roth IRA with Vanguard my Roth conversion is all online with a handful of clicks and happens at the close of business that day.

[SecondCor521]

Quote:

Originally Posted by pb4uski An advantage to having a tIRA that I hadn't thought of... since I have both a tIRA and Roth IRA with Vanguard my Roth conversion is all online with a handful of clicks and happens at the close of business that day.

Yeah, I was hoping for YakGrl's sake that Vanguard would have that same feature in place for her 401(k). But it's not exactly surprising that they don't.

@YakGrl, I know you already had them send you paperwork to do it one way. Another way would be for you to convert your 401(k) to a traditional IRA and then you could do the conversion online like @pb4uski and I do. It could be a faster/easier way if it otherwise makes sense in your situation and isn't too overwhelming. Just a thought.

[mountainsoft]

Quote:

Originally Posted by gauss The year of my first Roth conversion, I just converted a small amount. This was to ensure that I understood the entire process and had no surprises. In subsequent years I was then able to somewhat confidently increase the amounts of my conversions after having been through the whole process including the associated tax return.

Same here. I only converted $10K for my first Roth conversion in 2018. I converted another $20K in 2019. I'm planning to convert $25K in 2020 which should allow me to stay within the 12% tax bracket. I should be able to convert the remaining balance by 2022.