Estimated taxes in the year of retirement

[audreyh1]

Quote:

Originally Posted by gauss Be aware that you are limited to (1) one indirect (aka 60-day) IRA rollover every 365 days, so hopefully you haven't done one already this year (or late in 2017). Full details on the restrictions are available in IRS Publication 590-A under the "Rollover From One IRA into Another Section" beginning on pg 23. A one-pager from the IRS regarding this rule is also available here. -gauss

I don’t think anyone was recommending an IRA rollover, and Roth conversions are not limited.

[joylesshusband]

Quote:

Originally Posted by audreyh1 And when doing a Roth conversion it’s optimal to pay the taxes elsewhere and convert the whole amount. Not pay all or most of the taxes from the converted funds. What do you have left to put in your Roth?

Money is fungible.

If one is using Roth for withdrawals to cover annual living expense, the "whole amount" conversion is equal to a conversion of a partial amount and taxes paid from the converted funds.

In the first case, the amount needed for living expense is taken from the Roth while the tax amount is taken from other (after-tax) savings.

In the second case, the tax amount is taken from the Roth (via withholding in December) while a portion of the living expense is taken from the Roth and another portion - from the other (after-tax) savings (equal to the tax amount).

Exactly the same outcome, making withholding possible and obsoleting the entire "estimated tax payments" monkey business.
Q.E.D.

[kaneohe]

Quote:

Originally Posted by joylesshusband Or, since you are under 59 1/2, you could do a tIRA -> Roth IRA conversion instead of a tIRA withdrawal, and do (up to) 100% withholding, eliminating any sort of estimated tax payments just as above.

Not sure how this works........if you are < 59.5 and do a Roth conversion but withhold 100%, then nothing gets into the Roth . Isn't the withholding then taxed and penalized because of < 59.5 withdrawal ?

[joylesshusband]

Quote:

Originally Posted by kaneohe Not sure how this works........if you are < 59.5 and do a Roth conversion but withhold 100%, then nothing gets into the Roth . Isn't the withholding then taxed and penalized because of < 59.5 withdrawal ?

A conversion is not a withdrawal.
If you meant that the tax withholding is construed as a Roth withdrawal, be aware that withdrawals from Roth - up to the total of contributed (or converted) amounts - are neither taxed nor penalized.
The earnings on said contributions are a different story, depending on age and/or 5-year history....

[bingybear]

Quote:

Originally Posted by joylesshusband A conversion is not a withdrawal. If you meant that the tax withholding is construed as a Roth withdrawal, be aware that withdrawals from Roth - up to the total of contributed (or converted) amounts - are neither taxed nor penalized. The earnings on said contributions are a different story, depending on age and/or 5-year history....

don't roth conversions start a new 5 year waiting period?

[kaneohe]

Quote:

Originally Posted by joylesshusband A conversion is not a withdrawal. If you meant that the tax withholding is construed as a Roth withdrawal, be aware that withdrawals from Roth - up to the total of contributed (or converted) amounts - are neither taxed nor penalized. The earnings on said contributions are a different story, depending on age and/or 5-year history....

A conversion is a withdrawal from TIRA (that's why you get a 1099R) and transfer into a Roth. If you intercept the withdrawal before it gets to the Roth by withholding it, I see that as a withdrawal from the TIRA (not the Roth). If < 59.5 at that point, I'm guessing that's an early withdrawal subject to both taxes and penalty.

[joylesshusband]

Quote:

Originally Posted by kaneohe A conversion is a withdrawal from TIRA (that's why you get a 1099R) and transfer into a Roth. If you intercept the withdrawal before it gets to the Roth by withholding it, I see that as a withdrawal from the TIRA (not the Roth). If < 59.5 at that point, I'm guess that's an early withdrawal subject to both taxes and penalty.

I see your point.

However, I take the stance that there's no tax nor penalty, although I have not done personally this to prove it.

It is a fact that numerous tIRA principals do Roth conversions before reaching 59 1/2, and manage to pay the tax on the conversion as required, without being extra taxed or penalized.
It is inconceivable that all of them have declined the withholding and have this tax paid from other accounts.

This leads me to believe that the withheld money is not considered "intercepted before reaching the Roth" and is treated as taken from the Roth upon entry.

Can you offer a factual case or two to prove your supposition?

[SecondCor521]

I am not kaneohe, but:

I've done several traditional to Roth IRA conversions at Vanguard. They have never permitted me to withhold taxes on the conversion.

My father has done several (more than 10) traditional IRA withdrawals (his RMDs) at Vanguard. They always have let him withhold taxes on the withdrawals.

I don't know what happens with other IRA custodians.

[bingybear]

Quote:

Originally Posted by joylesshusband I see your point. However, I take the stance that there's no tax nor penalty, although I have not done personally this to prove it. It is a fact that numerous tIRA principals do Roth conversions before reaching 59 1/2, and manage to pay the tax on the conversion as required, without being extra taxed or penalized. It is inconceivable that all of them have declined the withholding and have this tax paid from other accounts. This leads me to believe that the withheld money is not considered "intercepted before reaching the Roth" and is treated as taken from the Roth upon entry. Can you offer a factual case or two to prove your supposition?

I think I see what game your are trying to play. You want to do the roth conversions that pays the tax from some where else. That somewhere is the roth you just created. I have never looked at if that is possible, but lets assume it is. So, you did the roth conversion on all the money and will have to pay tax from somewhere, so the tax due and must be paid. So,you take out the tax from the roth you just created. Being under 59.5 you will get hit with a penalty for withdrawing money converted to roth and held less than 5 years. See below.

5 year rule

Quote:

The Second 5-Year Rule, For Roth Conversions As the name implies, the second 5-year rule applies not to (new) Roth contributions, but to Roth conversions from traditional pre-tax retirement accounts, and determines whether Roth conversion principal will be penalty-free. To meet the 5-year rule for Roth conversions, again the measuring period is five tax years, which essentially means any Roth conversion is deemed to have occurred as of January 1st of that year (Treasury Regulation 1.408A-6, Q&A-5(b)). Notably, since conversions must occur by December 31st in a given year, their 5-year period will always start in the calendar year in which the conversion occurs; for instance, any conversion between January 1st and December 31st of 2013 will count as a 2013 conversion, but anything in 2014 will count as a 2014 conversion (by contrast, a new contribution as late as April 15th of 2014 could still be counted towards the 2013 tax year).

[pb4uski]

It is usually recommended that one pay taxes on Roth conversions from taxable accounts and not withholdings so that more funds gain tax-free status.

So let's say that one converts $1,000 and that conversion results in $100 in taxes.

If you pay the tax from taxable account funds, then at the end of the day you are $100 poorer but have $1,000 that will be tax-free.

If you pay the tax from the conversion (by having $100 of tax withheld), you are $100 poorer but only have $900 that will be tax-free.

[joylesshusband]

Quote:

Originally Posted by pb4uski It is usually recommended that one pay taxes on Roth conversions from taxable accounts and not withholdings so that more funds gain tax-free status. So let's say that one converts $1,000 and that conversion results in $100 in taxes. If you pay the tax from taxable account funds, then at the end of the day you are $100 poorer but have $1,000 that will be tax-free. If you pay the tax from the conversion (by having $100 of tax withheld), you are $100 poorer but only have $900 that will be tax-free.

This is not always the case.
I see that you have entirely missed what I explained in post #22.

[kaneohe]

Quote:

Originally Posted by joylesshusband I see your point. However, I take the stance that there's no tax nor penalty, although I have not done personally this to prove it. It is a fact that numerous tIRA principals do Roth conversions before reaching 59 1/2, and manage to pay the tax on the conversion as required, without being extra taxed or penalized. It is inconceivable that all of them have declined the withholding and have this tax paid from other accounts. This leads me to believe that the withheld money is not considered "intercepted before reaching the Roth" and is treated as taken from the Roth upon entry. Can you offer a factual case or two to prove your supposition?

https://www.wealthenhancement.com/bl...oth-conversion

"Let’s imagine you want to convert $60,000 to a Roth IRA and are in the 25% federal tax bracket. Setting aside state income taxes, you’d owe the IRS $15,000. The best way to pay the tax on your Roth conversion is with savings that are liquid and aren’t in a retirement account.

Here’s why: If you use the IRA to pay the $15,000 tax, you’d be left with $45,000 inside of a Roth. If the remaining $45,000 grows at a hypothetical 7% rate of return, you’d have nearly $125k after 15 years. If, however, you have enough money set aside in a non-qualified account (an account that is neither tax-deferred or tax-advantaged) to pay the bill and are able to keep the entire $60,000 in the Roth IRA, you’d have over $165k after 15 years.

It gets even worse if you’re under age 59.5 because the $15,000 you used to pay the conversion tax would be treated as an early distribution. The penalty tax is 10%, meaning you’ll need to pay an additional $1,500 in taxes you may not have anticipate"

[joylesshusband]

Upon further research, I have realized that kaneohe's stance on the matter is very valid, as clearly stated in this document:
https://personal.vanguard.com/pdf/s254.pdf?2210092791

Here's the excerpt sealing the matter:
Capture.PNG

I am hereby withdrawing the original suggestion I made to the OP.
Apparently, this tactics is only applicable after reaching 59 1/2.

[pb4uski]

Quote:

Originally Posted by joylesshusband This is not always the case. I see that you have entirely missed what I explained in post #22.

Yes, I ignored because it was odd/misinformed.

Since Roth's are tax-free by definition, if you withdraw from a Roth for living expenses then there are not taxee, therefor no need for tax withholding.

I don't think you can even do tax withholding on a Roth withdrawal... you can on a tIRA withdrawal or on a Roth conversion (which is a tIRA withdrawal where the proceeds go into a Roth).

[pb4uski]

Quote:

Originally Posted by joylesshusband Upon further research, I have realized that kaneohe's stance on the matter is very valid, as clearly stated in this document: https://personal.vanguard.com/pdf/s254.pdf?2210092791 Here's the excerpt sealing the matter: Attachment 28195 I am hereby withdrawing the original suggestion I made to the OP. Apparently, this tactics is only applicable after reaching 59 1/2.

No! What you posted "sealing the matter" applies at any age.... at less than 59 1/2 it is just worse than if after 59 1/2.

[bingybear]

OP, I think this has been a bit side tracked. I had the same questions when we RE 3 years ago. I was on a different investing in retirement related board back then and most said " pay 110% of what you paid in tax last year. I worked a couple months into that year and DW had carryover vacation. I paid more in estimated than I should have, but no where near the amount I paid the last year of full work. My estimated numbers were really close.

I've been paying estimated in the first quarter for the whole year because the amounts were relatively small and I don't want to miss a later estimated date.

I've been using a spreadsheet to calculate estimated taxes. I expect the calculation for the new law to be similar with the numbers changed. That said, I don't have complicated taxes.

[JoeWras]

Quote:

Originally Posted by bingybear OP, I think this has been a bit side tracked. I had the same questions when we RE 3 years ago. I was on a different investing in retirement related board back then and most said " pay 110% of what you paid in tax last year. I worked a couple months into that year and DW had carryover vacation. I paid more in estimated than I should have, but no where near the amount I paid the last year of full work. My estimated numbers were really close. I've been paying estimated in the first quarter for the whole year because the amounts were relatively small and I don't want to miss a later estimated date. I've been using a spreadsheet to calculate estimated taxes. I expect the calculation for the new law to be similar with the numbers changed. That said, I don't have complicated taxes.

Thanks bingybear.

The off-track discussion was interesting. I'm <59.5. There's no way I'm going to even attempt to play any IRA games. I just want to send the IRS a check to stay out of penalty zone.

Also no way I'm paying 110% of last year in a year which we're working 1/2, so I'm travelling your same road. I think there are other good strategies discussed here that will work just fine.

[gauss]

The Federal underwitholding penalty is not that severe (on the order of 2% I believe) so even if you get caught paying it, this shouldn't be the end of the world.

-gauss