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Old 12-11-2020, 09:51 AM   #21
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^^^ But of course, your better off to pay the tax from taxable funds. You can do that in one of two ways.

The easiest is to just have no withholdings and make an estimated tax payment directly to the feds.

The other is to have tax withheld and then deposit a check to your Roth within 60 days and request that it be coded as a rollover contribution.
I am underwithholding on my pension and I usually make up for that by having the lion's share of my federal and state taxes withheld from an end of year IRA withdrawal that funds the next year's spending shortfall. I haven't been doing quarterly estimated tax payments as the IRA withholding is considered to have been given equally throughout the year and hence I've avoided penalties in the past. This year we've already funded next year's spending from capital gains on an after tax account. I would like to do a Roth conversion before the end of the year to bring us up to near the ACA cliff. I don't want to pay the taxes out of the conversion as I'd like to maximize the conversion. Can I avoid a penalty by making a one time payment to state and fed taxes as soon as I do the conversion? If so, must this be done before the end of the year and is there a form I use for the feds? I will not be within safe harbor amounts without additional payments and it looks like I'll owe just over a thousand to feds and to state. Thankful for any input.
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Old 12-11-2020, 09:54 AM   #22
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Makes sense, one other basic question, is the 59.5 literal, so if I turn 59 on Sept. 1st of a year, March 1st following year is the 1st day for penalty free withdrawals?
Yes, six months after your 59th birthday. So if your brthday is Sept 1, 6 months later would be March 1... I wouuld wait until March 2 just to be sure.
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Old 12-11-2020, 10:01 AM   #23
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I am underwithholding on my pension and I usually make up for that by having the lion's share of my federal and state taxes withheld from an end of year IRA withdrawal that funds the next year's spending shortfall. I haven't been doing quarterly estimated tax payments as the IRA withholding is considered to have been given equally throughout the year and hence I've avoided penalties in the past. This year we've already funded next year's spending from capital gains on an after tax account. I would like to do a Roth conversion before the end of the year to bring us up to near the ACA cliff. I don't want to pay the taxes out of the conversion as I'd like to maximize the conversion. Can I avoid a penalty by making a one time payment to state and fed taxes as soon as I do the conversion? If so, must this be done before the end of the year and is there a form I use for the feds? I will not be within safe harbor amounts without additional payments and it looks like I'll owe just over a thousand to feds and to state. Thankful for any input.
Yes, but you'll need to fill out a Form 2210, section AI to show that your withholdings and estimated payments were made commensurate with your tax obligations for each quarter (and in this their quarters don't square exactly with calendar quarters).

Another option is to have taxes withheld from the conversion and then make a rollover contribution equal to the amount of the withholdings. So if you do a $10k conversion and have $2k withheld, the net of $8k ends up in your Roth and then you deposit $2k in your roth from taxable funds as a rollover contribution.

Either way, at the end of the day $10k comes out of your tIRA, $10k ends up in your Roth and $2k comes out of your taxable account and $2k is paid in estimated taxes/withholdings.

The advantage of the withholding route is that the IRS considers taxes withheld as paid evenly throughout the year when it comes to calculating underpayment penalties.
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Old 12-11-2020, 10:20 AM   #24
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Yes, six months after your 59th birthday. So if your brthday is Sept 1, 6 months later would be March 1... I wouuld wait until March 2 just to be sure.
I have a question about that. 1/2 year can be considered 6 months or it could be 365/2 days. 365/2=183 days rounded up. That would be March 3rd in a non-leap year. I have not seen where the half year is defined one way or the other. Do you know which way it is calculated? I wouldn't want npage to miss it by one day.
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Old 12-11-2020, 10:35 AM   #25
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Seems like a good thread to ask basic mechanic question on this. Next year I retire. I intend to roll at least 1/2 my 401K over to Vanguard in a traditional IRA. Keeping half at 401K for stable value fund.

In a year or so after that I will begin roth conversions. Do witholdings work like this? I call, tell Vanguard rep I would like to convert say $10,000 from IRA to Roth IRA. They will ask do I want withholding, if I say yes they withold 20% and I end up with Roth balance of $8,000. If I say no, it is $10,000 invested in Roth and I will owe IRS taxes on the $10,000 when taxes are due.

I think that is how it works but would be nice to hear from someone who has actually done it.
Why not convert a small amount now ie a few hundred dollars so that you can see how it works first hand?

If you do it before the end of the year, you will see the full effect on your taxes next April or so.

With Vanguard you can do it all online so that you can take the time to read all the details.

Note - this assumes that you currently have a traditional IRA in place.

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Old 12-11-2020, 10:40 AM   #26
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Yes, I intend to do that next year when I pull plug. Won't be converting my 401K to IRA until April maybe June depending on how leaving company goes. Then, yes, I will just do a small roth conversion for the education.

As to the 59.5, I will not have any real reason when that day comes to play it to close so I will wait a week to account for leap years, pandemics or other calamties. It's 14 years away right now, what could possibly change by then?
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Old 12-11-2020, 10:50 AM   #27
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I have a question about that. 1/2 year can be considered 6 months or it could be 365/2 days. 365/2=183 days rounded up. That would be March 3rd in a non-leap year. I have not seen where the half year is defined one way or the other. Do you know which way it is calculated? I wouldn't want npage to miss it by one day.
I think the IRS example uses days. I would use days plus a couple just to be sure.
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Strategy to move $$ to Roth
Old 12-11-2020, 10:57 AM   #28
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Strategy to move $$ to Roth

Can anyone explain the this strategy for getting $$ into a Roth? I can't figure it out.

http://https://seekingalpha.com/arti...it-around-roth
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Old 12-11-2020, 10:58 AM   #29
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Interesting, an non-IRS example I saw said 6 months, but I would go with 183 days to be safe.
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Old 12-11-2020, 11:00 AM   #30
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Can anyone explain the this strategy for getting $$ into a Roth? I can't figure it out.

http://https://seekingalpha.com/arti...it-around-roth
No idea.. and link doesn't work.
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Old 12-11-2020, 11:35 AM   #31
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I have a question about that. 1/2 year can be considered 6 months or it could be 365/2 days. 365/2=183 days rounded up. That would be March 3rd in a non-leap year. I have not seen where the half year is defined one way or the other. Do you know which way it is calculated? I wouldn't want npage to miss it by one day.
The actual law just says "59 1/2" without defining how to calculate it, though of course the IRS can interpret the law and create their own definition. In reality, when you make a withdrawal from an IRA, the only thing the IRS will know is what's on the 1099-R that the custodian issues. In other words, they'll only know the sum of all withdrawals made during the year. In order for them to figure out whether you were actually 59 1/2 at the time of the first withdrawal, they would first have to decide to audit you, and then they'd have to ask for the individual transaction details behind the 1099-R to do the age calc.

That's an awful lot of trouble to go through for a small amount. If your half-birthday is December 31, you're probably better off to wait until the next year, but otherwise it really shouldn't make any difference.
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Old 12-11-2020, 12:25 PM   #32
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Can anyone explain the this strategy for getting $$ into a Roth? I can't figure it out.

http://https://seekingalpha.com/arti...it-around-roth
It looks like they're using dividends to supply cash for a Roth to tIRA transfer of shares. I assume there is normally no spare cash in the tIRA.

I see it like this:
tIRA receives a dividend in cash from any source.
Sell Stock A in the Roth to raise the same amount of cash as the dividend and simultaneously buy the same amount of Stock A in the tIRA using that dividend cash. The effect is to move the cash to the Roth and Stock A shares to the tIRA.
When eventually all shares of Stock A have been moved from the Roth to the tIRA, start the same thing again with Stock B.

I'm not sure why anyone would want to do that, though I've certainly done something similar when rebalancing or exchanging shares. And it's one reason why I held 2% cash in my portfolio. That was a lot faster than waiting for dividends, which I generally avoided anyway.
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Old 12-11-2020, 01:34 PM   #33
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Yes, but you'll need to fill out a Form 2210, section AI to show that your withholdings and estimated payments were made commensurate with your tax obligations for each quarter (and in this their quarters don't square exactly with calendar quarters).

Another option is to have taxes withheld from the conversion and then make a rollover contribution equal to the amount of the withholdings. So if you do a $10k conversion and have $2k withheld, the net of $8k ends up in your Roth and then you deposit $2k in your roth from taxable funds as a rollover contribution.

Either way, at the end of the day $10k comes out of your tIRA, $10k ends up in your Roth and $2k comes out of your taxable account and $2k is paid in estimated taxes/withholdings.

The advantage of the withholding route is that the IRS considers taxes withheld as paid evenly throughout the year when it comes to calculating underpayment penalties.
Your solution of withholding and then reimbursing sounds easier. I was under the impression that Vanguard doesn't allow for withholding on Roth conversions. I'll have to look into that. Thanks!
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Old 12-11-2020, 04:41 PM   #34
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^^^ Actually now that you mention it I have never done withholding on a Roth conversion with Vanguard, only on tIRA withdrawals.
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Old 12-11-2020, 05:47 PM   #35
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^^^ Actually now that you mention it I have never done withholding on a Roth conversion with Vanguard, only on tIRA withdrawals.
But, a conversion is just a two step process, the first of which is a tIRA withdrawal. Anything could be, but I don't see how/why they'd limit withholding on conversions.
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Old 12-11-2020, 06:55 PM   #36
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Jerry, you piqued my curiosity so I started to do a Roth conversion on vanguard.com and ran into this...

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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.
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Old 12-11-2020, 07:00 PM   #37
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Jerry, you piqued my curiosity so I started to do a Roth conversion on vanguard.com and ran into this...
Interesting. Not sure what sense that makes. Maybe when setting it up they figured that anyone doing a conversion would want to get as much as possible in the ROTH and programed it that way.
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Old 12-11-2020, 07:13 PM   #38
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I'm guessing that by requiring you call to do withholding on a Roth conversion that it gives them the opportunity to counsel you to pay the taxes with taxable funds rather than have taxes withheld.... many people might not be aware of the advantage of paying taxes from outside funds with doing a Roth conversion.
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Old 12-12-2020, 12:00 PM   #39
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Jerry, you piqued my curiosity so I started to do a Roth conversion on vanguard.com and ran into this...
Yes, this is what I ran into too. I guess we will fill out form 2210 which I've now located. Thanks for the assist.
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Old 12-12-2020, 03:00 PM   #40
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The actual law just says "59 1/2" without defining how to calculate it, though of course the IRS can interpret the law and create their own definition. In reality, when you make a withdrawal from an IRA, the only thing the IRS will know is what's on the 1099-R that the custodian issues. In other words, they'll only know the sum of all withdrawals made during the year. In order for them to figure out whether you were actually 59 1/2 at the time of the first withdrawal, they would first have to decide to audit you, and then they'd have to ask for the individual transaction details behind the 1099-R to do the age calc.
Mostly correct, however I think there is a bit more to it than this.

In general, the 1099-R will be coded in Box 7 to tell if this is an early distribution (code 1 or code 2) or a normal distribution (code 7).

Your tax software (and the IRS's software) will look to this box to determine if a 10% early distribution penalty is due.

So the real question is how does your IRA custodian interpret the law and generate the box 7 code.

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