My first Roth conversion - advice

[YakGrl]

I am 60 years old now and retired in April of this year.
I started receiving my retirement payments in October of this year. This will be one of my lowest income years.
I am single and expect to be in a high tax bracket, particularly from 70+ as I plan to wait until 70 to take SS.
I am planning to call Vanguard and do a Roth Conversion for 2019 from my 401k that is at Vanguard to my Roth account that is also at Vanguard.
I plan to withdraw from Total Bond in 401K and deposit in Total Bond in Roth and then rebalance after the first of the year if needed.
I plan to pay taxes owed from my savings when I file taxes, so I will ask for no withholding on the conversion.
Is there anything I need to make sure to tell Vanguard or anything else I should be careful about?
This will be my first time doing a conversion from my 401K and I want to make sure I do it correctly.

 

[RunningBum]

I'd do it as soon as possible (Monday) to make sure the conversion you want happens in 2019. Fund transfers like this can take a little time. I can't recall how much since it's been quite a few years for me.

 

[YakGrl]

I'd do it as soon as possible (Monday) to make sure the conversion you want happens in 2019. Fund transfers like this can take a little time. I can't recall how much since it's been quite a few years for me.

I am planning to call on Monday or Tuesday, as soon as I get feedback from this great site.

Thank you!

 

[RunningBum]

Good. I would ask them whether it'll be quicker if you do a transfer in kind of the bonds you hold, or if you should liquidate them and have the cash transferred. Other than that, it seems pretty clear, so tell them what you've told us, that you want the 401K to be transferred/converted to a Roth at Vanguard before the end of the year. Maybe someone who's done this more recently than I has more advice.

 

[bingybear]

Good. I would ask them whether it'll be quicker if you do a transfer in kind of the bonds you hold, or if you should liquidate them and have the cash transferred. Other than that, it seems pretty clear, so tell them what you've told us, that you want the 401K to be transferred/converted to a Roth at Vanguard before the end of the year. Maybe someone who's done this more recently than I has more advice.

I don't use Vanguard, but I do roth conversions at two other major investment houses. Both have online method that you can make the conversion (move from TIRA to RIRA). I've gone the easy route to just have them move it (do the conversion). I've gone to moving assets as this happens almost instantaneously. I believe if you sell the asset before moving it may require for it to settle before moving to the new account.

 

[Third Son]

I am 60 years old now and retired in April of this year.
I started receiving my retirement payments in October of this year. This will be one of my lowest income years.
I am single and expect to be in a high tax bracket, particularly from 70+ as I plan to wait until 70 to take SS.
I am planning to call Vanguard and do a Roth Conversion for 2019 from my 401k that is at Vanguard to my Roth account that is also at Vanguard.
I plan to withdraw from Total Bond in 401K and deposit in Total Bond in Roth and then rebalance after the first of the year if needed.
I plan to pay taxes owed from my savings when I file taxes, so I will ask for no withholding on the conversion.
Is there anything I need to make sure to tell Vanguard or anything else I should be careful about?
This will be my first time doing a conversion from my 401K and I want to make sure I do it correctly.

Everything that I have learned has convinced me that bonds belong in 401k (or IRA) and equities belong in Roth IRA. That way you can get the AA you want with maximum tax free growth potential.

 

[YakGrl]

I don't use Vanguard, but I do roth conversions at two other major investment houses. Both have online method that you can make the conversion (move from TIRA to RIRA). I've gone the easy route to just have them move it (do the conversion). I've gone to moving assets as this happens almost instantaneously. I believe if you sell the asset before moving it may require for it to settle before moving to the new account.

I have done rebalancing online, but with this first conversion, I plan to call to make sure I get any feedback needed during the process. This will be a conversion from my 401K to my Roth.
This will be the first withdrawal from my 401K so I am not sure what that will require.

 

[YakGrl]

Everything that I have learned has convinced me that bonds belong in 401k and equities belong in Roth IRA. That way you can get the AA you want with maximum tax free growth potential.

Thank you. Yes, I have heard that too. I have the majority of my bond funds in my 401K, but I keep a smaller percentage in Roth. I want to be able to have some funds in bonds in Roth to use if I need to access it quickly and it is a bad time to sell stocks. I'm not sure that is optimal but it helps me sleep well at night and not sweat the market swings.

 

[Midpack]

I don’t know how long it takes via phone, but I wouldn’t expect it to take any longer than online. I’ve moved funds from my TIRA>Roth twice this year with Vanguard (first conversion was $1000 just as a test) and it only took about 2 business days online once you have the Roth account set up (sounds like OP already has). I wasn’t any more difficult than any account transfer or buy-sell-exchange IME - all mine have taken 2-3 business days that I remember.

 

[SecondCor521]

You can certainly call in. Personally I prefer to do it online, because I don't want to say "sixteen" and have them hear "sixty" or type "116". But that's just me.

You can likely do it online as long as you can see both accounts when you log in to your account. On Vanguard's site, you have to go to "My Accounts" -> "Balances and holdings". Scroll down to your 401(k), then look for a link at the top middle of the account that says "Convert to Roth IRA". The "Convert to Roth IRA" link does not exist in the "Account Overview" area; you have to go to "Balances and holdings".

You can convert shares of your total bond fund; all you have to do is put in the number of shares you want to convert. The value of the conversion that will be reported to you on your 1099-R will be the market value as of the next market close. So if you did the transaction any time between now and 4pm EST tomorrow, you'd get tomorrow's closing market value.

The shares will move over in a day or two.

The only thing to be careful about is that you can no longer undo Roth conversions, and you'll pay income taxes on whatever amount you convert. So be sure of that before you make the decision. Other than that, the actual process itself is really easy.

 

[YakGrl]

You can certainly call in. Personally I prefer to do it online, because I don't want to say "sixteen" and have them hear "sixty" or type "116". But that's just me.

You can likely do it online as long as you can see both accounts when you log in to your account. On Vanguard's site, you have to go to "My Accounts" -> "Balances and holdings". Scroll down to your 401(k), then look for a link at the top middle of the account that says "Convert to Roth IRA". The "Convert to Roth IRA" link does not exist in the "Account Overview" area; you have to go to "Balances and holdings".

You can convert shares of your total bond fund; all you have to do is put in the number of shares you want to convert. The value of the conversion that will be reported to you on your 1099-R will be the market value as of the next market close. So if you did the transaction any time between now and 4pm EST tomorrow, you'd get tomorrow's closing market value.

The shares will move over in a day or two.

The only thing to be careful about is that you can no longer undo Roth conversions, and you'll pay income taxes on whatever amount you convert. So be sure of that before you make the decision. Other than that, the actual process itself is really easy.

That does sound simple. I will log on tomorrow and see if I can do it online as you describe. I just want to make sure they don't withhold taxes from the transfer as I want to convert the full amount and pay the taxes from savings. I have rebalanced my 401K online before, I just haven't withdrawn or transferred from it before. Thank you!

 

[Midpack]

That does sound simple. I will log on tomorrow and see if I can do it online as you describe. I just want to make sure they don't withhold taxes from the transfer as I want to convert the full amount and pay the taxes from savings. I have rebalanced my 401K online before, I just haven't withdrawn or transferred from it before. Thank you!

Online there’s a box you tick to NOT withhold taxes BUT IIRC there was a note when I did it that said they couldn’t withhold (even if I wanted) with a reminder to make arrangements for estimated taxes.

 

[RunningBum]

I missed that both accounts are at VG. I've never had a 401K there, but I'm sure that'll make things go more quickly, and possibly online. I've only done conversions between a tIRA and a Roth (and those happen very quickly), not directly from a 401K.

 

[SecondCor521]

That does sound simple. I will log on tomorrow and see if I can do it online as you describe. I just want to make sure they don't withhold taxes from the transfer as I want to convert the full amount and pay the taxes from savings. I have rebalanced my 401K online before, I just haven't withdrawn or transferred from it before. Thank you!

Here's what Vanguard's site says about tax withholding when I click on the "Convert to Roth IRA" link:

"Step 4: Tax withholding
The conversion amount moving out of your retirement account may be subject to federal or state income tax.

Federal and state income tax
Withholding for federal and state taxes isn't available for Roth conversions requested on vanguard.com. You must elect not to have withholding applied to proceed. Call us at 877-662-7447 if you need information about requesting a Roth conversion for which you would like withholding. You must check the box below before you can continue.
I elect not to have federal and state income taxes withheld from this distribution. I understand that I'm responsible for paying any taxes due, and that if my estimated tax payments are insufficient, I may incur penalties.

Receive a tax withholding notice
The tax withholding notice is an informational publication that explains federal income tax withholding options for IRA distributions. Choose your delivery preference below.
Notice election
Do not send a tax withholding notice.
Send a tax withholding notice to my registered e-mail address.
Send a tax withholding notice by U.S. mail to my address of record."

The above is for a Vanguard traditional IRA to a Vanguard Roth IRA, but I'd bet it is the same if the source account is a Vanguard 401(k).

 

[YakGrl]

Here's what Vanguard's site says about tax withholding when I click on the "Convert to Roth IRA" link:

"Step 4: Tax withholding
The conversion amount moving out of your retirement account may be subject to federal or state income tax.

Federal and state income tax
Withholding for federal and state taxes isn't available for Roth conversions requested on vanguard.com. You must elect not to have withholding applied to proceed. Call us at 877-662-7447 if you need information about requesting a Roth conversion for which you would like withholding. You must check the box below before you can continue.
I elect not to have federal and state income taxes withheld from this distribution. I understand that I'm responsible for paying any taxes due, and that if my estimated tax payments are insufficient, I may incur penalties.

Receive a tax withholding notice
The tax withholding notice is an informational publication that explains federal income tax withholding options for IRA distributions. Choose your delivery preference below.
Notice election
Do not send a tax withholding notice.
Send a tax withholding notice to my registered e-mail address.
Send a tax withholding notice by U.S. mail to my address of record."

The above is for a Vanguard traditional IRA to a Vanguard Roth IRA, but I'd bet it is the same if the source account is a Vanguard 401(k).

That answers my question on how to make sure they don't withhold taxes. I do not pay state income tax as a Florida resident. I will ask my CPA if I need to pay estimated taxes in early January, but I would assume that if I pay taxes owed in April that should be ok.

 

[cbo111]

That answers my question on how to make sure they don't withhold taxes. I do not pay state income tax as a Florida resident. I will ask my CPA if I need to pay estimated taxes in early January, but I would assume that if I pay taxes owed in April that should be ok.

I am also a FL resident and did what you describe earlier this year. I just called my dedicated VG advisor and told him what I wanted and he executed the move. My advisor is a nice guy, but almost too thorough in covering all the possible issues. He repeated several times that I would incur an approx $5K tax hit. I spent about 30 minutes on the call, the bulk of time discussing my overall portfolio, grandkids, vacation plans, etc. The actual trade took about 5 minutes. I guess they are trained to become your friend as well as advisor.
I plan to just pay the taxes owed in April 2020.

 

[YakGrl]

I am also a FL resident and did what you describe earlier this year. I just called my dedicated VG advisor and told him what I wanted and he executed the move. My advisor is a nice guy, but almost too thorough in covering all the possible issues. He repeated several times that I would incur an approx $5K tax hit. I spent about 30 minutes on the call, the bulk of time discussing my overall portfolio, grandkids, vacation plans, etc. The actual trade took about 5 minutes. I guess they are trained to become your friend as well as advisor.
I plan to just pay the taxes owed in April 2020.

With the information given today, I plan to do the conversion this week, I will try to do it online but if I feel I need help I will call Vanguard for their execution. I believe I can do it online. This will be a learning experience and the impact on my taxes will become the focus of my next meeting with my CPA so that I can plan early for decision on 2020 conversions. I should have a better handle on taxes and income next year as I will be on pension for the full year and known deferred income.
Thanks to all who have given advice!

 

[SecondCor521]

One minor additional comment. On Vanguard's Roth conversion page, you put in how many shares you want to convert, not the dollar amount.

Once you put in the share count, I think it will show you how much that will be in dollars, based on the most recent fund price. What you actually will end up converting will depend on the next closing price, so it can change a little bit depending on how the market moves that day.

If you're close to any sort of tax threshold, it's usually good to convert slightly fewer shares so that any variation in share price won't throw you over the tax cliff. You can always do a second, smaller Roth conversion after you see how your first one turns out.

 

[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.

 

[targatom2019]

since it's on the topic of Roth conversion, is there a formula of how much to convert to stay in the low tax bracket for family of two, married both are at 50 ? Sorry not mean to hijack the thread

1. Expected income of 40K from building rentals.
2. Equity dividends from taxable account will be 15K
3. Interest from muni bond will be 16K

 

[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]

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]

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]

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.