Fidelity Roth Conversion Questions

[CRLLS]

Yesterday I did my 1st Roth conversion. I went to my Fidelity account and filled out the blanks. Almost immediately, the number of mutual fund shares chosen moved from my Rollover to my Roth. My question is, what should I expect to see for documentation, both now and for tax purposes? If I look at my account history today, I see "x" shares moved, however there is no dollar amount shown. Being a MF, I'm not sure what the value per share actually was.

Further, I will have to pay theh taxes, of course. How is that actually executed? Is it done via the 1040ES form or some other document? The 1040ES worksheet really does not work for a Roth conversion. Do I just estimate the tax burden and send in payment with the 4th Qtr 1040ES form? Will I get dinged for not submitting the previous 1st thru 3rd Qtrs? I'm a bit gun shy because I've been fined in earlier years (only a few dollars) for being a couple of days late on one qtr's payment.


I've searched here and other websites and although I usually have good Google Fu, I did not find my answers.

 

[ERD50]

1099-R will show it as a taxable distribution. -ERD50

 

[RunningBum]

If you already have some taxes being withheld, you can increase the withholding to pay the conversion taxes. It does not matter when you do the withholding; there is no fine for not paying enough early.

Another option is to use EFTPS to pay estimated federal taxes, and most states have similar sites to pay their taxes.

You can use 1040-ES for quarterly taxes. I prefer online for better tracking.

Since you just converted, it's ok to pay the taxes in the 4th quarter (by ~Jan 15). You won't be fined for not making even quarterly payments, but you may need to fill out a form to show which quarters your income and deductions occurred in to show why the timing of tax payments was appropriate. I think it's form 2210?

Then there's safe harbor, where if you paid 100% of last year's taxes (110% for high earners), you aren't fined for coming up short.

 

[Clone]

If you feel that you need to make some estimated tax type withholding, you can do a normal distribution from the IRA, but send the majority of the distribution to withholding. I think the default is 10% for fed, and it was 5% for state (that could be state specific). But you could put 85% to fed and 10% to state, for example. We have done that in the past if we thought we were going to be short on withholding.


I also did a ROTH conversion last night, and like you said, the shares just moved. But the $ amount that shows up on the 1099-R will be very close to whatever the value was yesterday.

 

[bingybear]

I've done it once online with fidelity and will do it again this month. However I have not done it with MF. Since you use MF I would expect the pricing would be determined at the end of the day. As ERD50 noted it will be available on the 1099-R. The 5498 may have the info earlier.

Now on paying taxes partially depends if you paid with the conversion. If so and you paid enough then you are likely find. If not and you need to pay more then you can use estimated forms or skip the forms and pay it electronically. Depending on your situation you could be in for penalties if you have not paid enough in a timely manner.

edit - if you do tax payments using withholding then time may not matter. If you do tax payments with estimated, then timing can matter.

I've used estimated, but have used safe harbor rule so not to have penalties.

 

[oldphd]

Yesterday I did my 1st Roth conversion. I went to my Fidelity account and filled out the blanks. Almost immediately, the number of mutual fund shares chosen moved from my Rollover to my Roth. My question is, what should I expect to see for documentation, both now and for tax purposes? If I look at my account history today, I see "x" shares moved, however there is no dollar amount shown. Being a MF, I'm not sure what the value per share actually was.

I have done this numerous times, and it has been a pet peeve as to the reporting! You look under lots and it has original basis you bought it for, not day it was traded. The tax forms don't show up until January. But if you are fine tuning your taxes you want to know in this calendar year!

I track it myself, checking the closing that day. IIRC I looked up some info on Fidelity, and found that if the transfer is requested by 7 PM (or something like that, past the 4 PM market close), it's that day. You put it in as shares, look up the MF closing price that day and multiply, and you've got it.

This year I was poking around more, and found that the monthly statement does show it with the amount that you will see on your 1099. However, that doesn't help with Dec, if you are still trying to make more of a CG trade or conversion. As it happens, I made a conversion on 11/29 when I was doing some other financial things. I will be further fine tuning after 12/15 when I know values of interest and distributions.

Good problems to have, though!

 

[CRLLS]

Thanks guys,

The only real sources of income I have this year other than the Roth conversion will be IRA withdrawals, SS and a small annuitized LI policy, all have tax automatically withheld.

The conversion was made with 100% pretax money and done without any withholding. So tax obligation will be made from on-hand cash. the total amount of withheld and 1099ES payments will be about 4-5% over what I calculate my final tax obligation.

I live in Illinois where no retirement income is taxed, not even Roth conversions. I expect there will be no state tax at all. I've never done an EFTPS before.

As I summarize your responses:

a) The exact amount will be shown on the 1099R form as well as my monthly statement.

b) I can pay either via 1099ES or online EFTPS and not be fined due to the other situations mentioned above.

Thanks a bunch. I feel more comfortable now.

 

[pb4uski]

I think you can get a reasonable estimate of the amount of the Roth conversion by looking at the shares transferred and the NAV as of closing on the day of transfer. I don't have Fidelity for my IRA yet, but on Vanguard I can go the the Tax Center and see the amount of my retirement account distributions, FWT and SWT at anytime online... and my Roth conversion is reported as a retirement account distutibution... I'd be surprised if you can't do the same.

What I would then do is do a tax calculation based on what you know on income and withholding and see if you will owe any tax. If you do, the easiest thing might be to just do another iIRA withdrawal but have 100% withheld for taxes... the IRS counts such withholdings as being paid evenly throughout the year even if they are done in December. The other nice thing about doing it that way is that it further reduces your tIRA and future RMDs... just be aware that what you withdraw that way will be taxable income as well so it is a bit iterative to nail it to the dollar but you don't need to be that precise.

 

[fosterscik]

I have a very similar problem. It's a little challenging to decide how to handle this and any comments would be appreciated (and may help the OP so its not too much of a thread hijack). I want to go to the top of the 0% cap gains/div bracket (77.2k for MFJ).
I have about 41k in head room which gives me two choices that I can see:
1) Make a 37k Roth conversion and a 4k IRA withdrawal at 100% tax to take care of any underpayment penalty
2) Make a 41k Roth conversion and pay the taxes and an underpayment penalty from after tax funds. H&RBlock suggests I will owe $30.

Any downside to doing option 2? Anything I'm missing?

 

[RunningBum]

I have a very similar problem. It's a little challenging to decide how to handle this and any comments would be appreciated (and may help the OP so its not too much of a thread hijack). I want to go to the top of the 0% cap gains/div bracket (77.2k for MFJ).
I have about 41k in head room which gives me two choices that I can see:
1) Make a 37k Roth conversion and a 4k IRA withdrawal at 100% tax to take care of any underpayment penalty
2) Make a 41k Roth conversion and pay the taxes and an underpayment penalty from after tax funds. H&RBlock suggests I will owe $30.

Any downside to doing option 2? Anything I'm missing?

If you are worried about going just over, #1 gives you the opportunity to recharacterize the IRA withdrawal. But it's not a cliff like the ACA so going $100 over isn't a big deal.

 

[fosterscik]

Thanks! I don't use ACA insurance so no health-care cliff to worry about - It seems to me that its worth a <$30 "fee" to get a little more converted into a Roth and I'll probably go with option 2.

 

[oldphd]

I think you can get a reasonable estimate of the amount of the Roth conversion by looking at the shares transferred and the NAV as of closing on the day of transfer.

This will get you the exact number, as long as you are certain of the day of transfer. If it was done during market opening or up until a short time after (3 hours?) it will be that day's close. I found this detailed info once on their website, but not sure where exactly. I've done this for the past several years, trying to fine tune down to the dollar. Since I have some nondeductible contributions that ends up being the bigger source of unknown for me, though I can get close (within $20 or so), depends on how much the market moves last days in the year to affect balances, I'll do my last conversion a day or two before end of year. I'll do a good sized conversion, maybe 75-80% of target, then a week before aim for getting to 98-99%, leaving one last small conversion.

When converting my wife's account which had only deductible contributions, I got it to the dollar.

 

[CRLLS]

The exact dollars converted is not important at the moment. As long as I will know later when I file taxes, my rough number works for me in this instance. I just applied for the EFTPS website and will get an ID number in the mail within a week. I plan to pay taxes from a cash account, the difference between my 2 tax calculations before and after the Roth conversion. That should get me close enough I think.

Thanks for the help all. This site is great.

 

[PatrickA5]

When I do my conversions (or withdrawals), I just ask to convert a given $ amount - not number of shares. That way, there's no figuring out what will show up on the 1099R. I use TurboTax to calculate how much to convert and usually get within a few dollars of the top of the 12% bracket.

 

[oldphd]

When I do my conversions (or withdrawals), I just ask to convert a given $ amount - not number of shares. That way, there's no figuring out what will show up on the 1099R. I use TurboTax to calculate how much to convert and usually get within a few dollars of the top of the 12% bracket.

At Fidelity, this only works if you have a cash component. The partial conversion option with a mutual fund asks for shares (as opposed to other transactions where you can select $$). Perhaps I'm missing something and there's another way, but I looked for that option without success.

 

[pb4uski]

In short, that's stupid. You should be able to say a dollar amount and then they divide the dollar amount by the end of day NAV and redeem that number of shares. I have done that for years with Vanguard and am very surprised that Fidelity wouldn't have the same capability.

 

[TwoByFour]

I am curious if you have the exact same number of shares in your Roth that you had in the IRA after doing the conversion. I believe Fido would have to first sell, then buy shares to fix the price and satisfy the IRS on the value of the IRA withdrawal. But if they are doing a buy/sell when doing a conversion for you, there will be a spread and you will pay that spread by having less shares, and Fido is the recipient of the spread. If this is happening, you will be better off by executing your own sell order and buy order as Fido is going to pick a spread that suits them, not you.

 

[gauss]

If you do prepay taxes via 1040ES as opposed to 'withholding', you will likely be required to fill out from 2210 "Underpayment of Estimated Tax by Individuals, Estates and Trusts". Furthermore since you have not been making identical 1040ES payments all year, you will likely need to fill out part IV of this form (ie not the short method). This, in my opinion, is similar to filling out 4 separate tax returns, ie one for each quarter.

If you have tax software available for prior years, you may want to start taking a look at this form now. Perhaps the penalty is small an not worth worrying about.

Alternatively perhaps you may wish to make another withdrawal from a retirement account and have close to 100% of the distribution withheld for state and fed income taxes (in the case the check payable to you may be for only a few dollars).
This will allow you to avoid IRS Form 2210 if you have enough withheld. Note the absolute deadline for the 2nd distribution would be 12/31/2018.

-gauss

 

[oldphd]

In short, that's stupid. You should be able to say a dollar amount and then they divide the dollar amount by the end of day NAV and redeem that number of shares. I have done that for years with Vanguard and am very surprised that Fidelity wouldn't have the same capability.

Yes, it's stupid. As I said, it's one of my pet peeves.

 

[oldphd]

I am curious if you have the exact same number of shares in your Roth that you had in the IRA after doing the conversion. I believe Fido would have to first sell, then buy shares to fix the price and satisfy the IRS on the value of the IRA withdrawal. But if they are doing a buy/sell when doing a conversion for you, there will be a spread and you will pay that spread by having less shares, and Fido is the recipient of the spread. If this is happening, you will be better off by executing your own sell order and buy order as Fido is going to pick a spread that suits them, not you.

Yes, the exact same number of shares. I should add that I am converting a Fidelity mutual fund, one of the index funds. Buried earlier in the thread, but what started the conversation was that AFTER the move, it shows a "basis" and date acquired that matches whenever you got it. For example (note all numbers are picked at random, I'm not looking anything up!) I bought 1000 shares of Fido Total Market in 2015 for $20/share in my traditional IRA. Today I Roth convert 100 shares today at $37/share. This gives me a conversion of $3,700. However, if I look in my lots in the Fido Roth, I see an acquired date in 2015 (not today), and a basis of $2,000. I have to look at transactions to find the conversion and wait for the monthly statement to see the transaction value unless I track and calculate it myself.

Since I can only pick shares, if I'm shooting for a specific dollar amount and the market moves much that day, I may miss my target. This is why I will start with a conversion some 10-20% below my target, then do another and possibly a third to get close to my dollar target.

 

[oldphd]

Screen capture of conversion. Unfortunately I can't share the lot info without disclosing personal info. Trust me.

 

[CRLLS]

I am curious if you have the exact same number of shares in your Roth that you had in the IRA after doing the conversion. I believe Fido would have to first sell, then buy shares to fix the price and satisfy the IRS on the value of the IRA withdrawal. But if they are doing a buy/sell when doing a conversion for you, there will be a spread and you will pay that spread by having less shares, and Fido is the recipient of the spread. If this is happening, you will be better off by executing your own sell order and buy order as Fido is going to pick a spread that suits them, not you.

Above in red is my edit:

I don't know if they buy and then sell. I suspect that Fidelity does some sort of paperwork conversion without selling and buying. Then sets the total dollars converted later at market close. I say that because I did the conversion during trading hours. The MF shares were immediately removed from my regular IRA and Fidelity immediately posted the identical MF shares to my Roth IRA. In addition, there was no opportunity to request buying a different ETF for instance. Perhaps if I were to do it by talking to a real person it would have been done differently. There may have been a day the 2 transactions if that had happened as they sold and bought on different days. Now that that the conversion is done, I can still sell the MF and buy a different MF, ETF, Bonds, company shares, etc. now that it in the Roth without any issues.

 

[pb4uski]

So to convert a dollar amount one would need to sell shares to cash afor a little more than the dollar amount that you want to convert and then convert a dollar amount out of cash and the do a buy for any leftover cash.

Vanguard's process is a lot better... just convert a dollar amount and the calculate the shares based on the closing NAV.

 

[CRLLS]

So to convert a dollar amount one would need to sell shares to cash afor a little more than the dollar amount that you want to convert and then convert a dollar amount out of cash and the do a buy for any leftover cash.

Vanguard's process is a lot better... just convert a dollar amount and the calculate the shares based on the closing NAV.

One could do go thru those gyrations I suppose. If I were concerned about converting the maximum dollars while still meeting ACA limits, that would be the plan. The relatively safe way is calculating the number of shares needed and converting maybe 2% less shares incase there is a runup at the end of the day. Alternatively your plan would work but you are at risk of different values due to the different days/times of trades, which could be good or bad.

 

[oldphd]

So to convert a dollar amount one would need to sell shares to cash afor a little more than the dollar amount that you want to convert and then convert a dollar amount out of cash and the do a buy for any leftover cash.

Vanguard's process is a lot better... just convert a dollar amount and the calculate the shares based on the closing NAV.

Could do that. But when you do a sell they allow you to select the dollar amount, so except for the potential few cents in interest you would only need the first two steps, no money left to rebuy.

I've chosen to do multiple conversions where I undershoot, doing 75-80%, then another 15-20%, then a final, give or take. The % error in the changing close is a smaller dollar amount as you get closer to your target.

Starting next year I am tentatively planning to increase my conversion amount for various reasons. I'm thinking I will start to do some monthly conversions through the year from a dollar cost averaging standpoint. That will also alleviate the error since late in the year you can adjust the conversion amount.

Certainly ways around, just annoying, because as you point out it should be doable in one step, just a user interface change.