Quick Roth Conversion Tax ?

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Got it, I plan to roll 401k to Trad. IRA next year with small test conversion to Roth, large conversions do not start until 5 years after. So the 1st 5 year clock will be more than satisfied by time I start taking withdrawals.

If all goes to plan I may not even take those withdrawals before 59.5 anyways. Thanks.

 

[JoeWras]

gauss, as usual, said it all as to what I was talking about. I doubt I'll need my Roth any time soon but it doesn't hurt to start that first-open-Roth timer. I did not have a Roth account before. This is my first. I was 56 when I made that first contribution, so what gauss is saying is spot on.

Sorry to confuse the issue.

 

[gauss]

It is quite a good feeling to not actually need the Roth assets before age 59 1/2 but to know that the contributions and possibly conversions are available to you.

-gauss

 

[CRLLS]

It is quite a good feeling to not actually need the Roth assets before age 59 1/2 but to know that the contributions and possibly conversions are available to you.

-gauss

I always figured that the retirement accounts were for exactly that, retirement. If the SHTF while still in the saving mode, I could access it, albeit with a possible penalty (5 yr or 59.5 or ?) and the associated possible tax implication (tIRA). I just figured that if the time came that I NEEDED to access it before retirement time, that 10% penalty would not be a big deal if it was keeping me out of bankruptcy. Fortunately I never needed to access the retirement stash before retirement. Plan for the worse and hope for the best.

 

[calnomore]

Yes, there is the limitation on how often you can do it.

Thanks for the great info.
I still like your option of rolling the taxes back into the Roth.
Sorry for the questions.

So I understand.
If you don't have any withholdings or quarterly payments throughout the year and you take a tIRA distribution at the end of the year and send in the taxes from a taxable account will you be penalized?


If you and DW each have a tIRA and a Roth you could alternate years doing a Roth conversion and rolling the taxes back into the Roth so you avoid the 12-month limitation on how often you can do it?

 

[pb4uski]

....If you don't have any withholdings or quarterly payments throughout the year and you take a tIRA distribution at the end of the year and send in the taxes from a taxable account will you be penalized?...

No, but to prove that the timing of your tax payments was commensurate with your tax obligations you may have to fill out Form 2210, Schedule AI... which some people think of as a slight PITA.

... If you and DW each have a tIRA and a Roth you could alternate years doing a Roth conversion and rolling the taxes back into the Roth so you avoid the 12-month limitation on how often you can do it?

Yes, I think so as the limitation is per IRA and not for a couple.

 

[Brat]

I am paying taxes on a tIRA to rIRA out of my checking account, maximizing the value of the conversion.

Just for giggles, I tried a small conversion yesterday between Fidelity accounts. It wouldn't approve deductions for income taxes. I don't know if the conversion was too small or it is too late in the year for them to process tax deposits.

 

[SecondCor521]

Yes, I think so as the limitation is per IRA and not for a couple.

I thought it was per person.

So if I had two IRAs and did an indirect rollover from one of those IRAs today, then I would still have to wait 12 months plus 1 day to do an indirect rollover, regardless of whether I did this second rollover from the first IRA or the second IRA.

But I agree with you that if I had a spouse, they could do an indirect rollover from one of their IRAs. Provided, of course, that they had not done an indirect rollover in the past 12 months. IOW, me having done an indirect rollover doesn't impact their ability to do one.

Since most people only have one IRA of each type, what you wrote is typically equivalent. But some people have multiple for whatever reason.

 

[pb4uski]

I thought it was per person.

So if I had two IRAs and did an indirect rollover from one of those IRAs today, then I would still have to wait 12 months plus 1 day to do an indirect rollover, regardless of whether I did this second rollover from the first IRA or the second IRA.

But I agree with you that if I had a spouse, they could do an indirect rollover from one of their IRAs. Provided, of course, that they had not done an indirect rollover in the past 12 months. IOW, me having done an indirect rollover doesn't impact their ability to do one.

Since most people only have one IRA of each type, what you wrote is typically equivalent. But some people have multiple for whatever reason.

You are right... I worded it poorly... per person.

 

[2retireearly]

Yes... You have 60 days to put the withholding back into the Roth, but I would do it sooner rather than later. Essentially the transaction is split into two, with the withholding part being a cash distribution to you and you have 60 days to put it back.

I'm confused.
If he does a rollover from a 401K, pretax money, to another IRA/401k, then 100% can be rolled over with no tax consequence, now. The 60 days, is there, in case they send it to you as a check, you have the 30 or 60 days to hurry up and put it into the 401/ira pretax acct, and therefore no tax is due.

BUT....If he did a rollover from a 401K (PreTax money so totally taxable) to a Roth, which is post tax money, he needs to pay the income tax on the 401K money. Only post tax money goes into a Roth. Tax is due on all money you removed from a 401k, unless you roll it into another pretaxed IRA account.

 

[pb4uski]

I don't think you followed the entire conversation. He had done a Roth conversion and mistakenly had taxes withheld and was figuring out how to "fix" it... and I was suggesting that he could "fix" it by contributing an amount equal to what was withheld within 60 days. And he knows that he'll owe tax on the gross amount of the conversion.

So say his conversion was 100 and the tax withheld was 20... when he did the transaction the net of 80 went into his Roth... he'll separately add 20 within 60 days from his taxable funds as a rollover contribution... so 100 ends up in his Roth... and he will have 100 of income.

That's all their is to it.

 

[2retireearly]

I don't think you followed the entire conversation. He had done a Roth conversion and mistakenly had taxes withheld and was figuring out how to "fix" it... and I was suggesting that he could "fix" it by contributing an amount equal to what was withheld within 60 days. And he knows that he'll owe tax on the gross amount of the conversion.

So say his conversion was 100 and the tax withheld was 20... when he did the transaction the net of 80 went into his Roth... he'll separately add 20 within 60 days from his taxable funds as a rollover contribution... so 100 ends up in his Roth... and he will have 100 of income.

That's all their is to it.

OK, that still actually doesn't make sense to me. But..I'm ok with dropping out of the conversation. But, when one does a Roth Conversion, the taxes are due at that moment. They aren't deferred anymore. So, in your example, if he converted 100 from a IRA(deferred,taxable), to a Roth, then he owes 20 tax on it, and only the net of 80 is put into the Roth, and that of course will then no longer have tax on it, as it was paid. Money in Roth is always net of taxes. The 20 shouldn't be put into the Roth.

 

[pb4uski]

No, you aren't getting it yet but you are close.

He did a 100 Roth conversion and mistakenly had 20 of tax withheld. He knows all along that he'll have 100 of income and pay 20 in tax. By transferring 20 from checking to his Roth then his Roth within 60 days he has 100 in the Roth, which is what he intended to begin with... and 20 has been paid to the feds for taxes.

It is no different than if he had not made the mistake, had done a 100 Roth conversion with no withholding which resulted in 100 in his Roth, and then made a 20 estimated tax payment to the feds from his checking account.

In both cases at the end of he day his tIRA is 100 less, his Roth is 100 more, his checking is 20 less and 20 has been paid to the feds towards his tax bill.

In fact, his "mistake" is slightly preferable because the 20 that the feds received in income taxes withheld is treated as if paid throughout the year for the purpose of underpayment penalties while a 20 estimated payment is treated as paid in the quarter that it was received.

 

[cat4ever]

Yes, except for the exact sums, it's exactly as pb4... has described. I have since deposited into the Roth the exact amount that was withheld and sent to the IRS, using post tax money from my bank account. The exact sums are 50k converted for which I had 22% withheld, which I believe is the tax bracket the money will be taxed at.

Which leads me to another question, should I bother sending estimated taxes to state for such a sum? we tax at about 6% here in MO, so about $3000. Would that be correct? Sorry, I've only done one other roth conversion in my life, back in 1998. those were the days you could spread the tax hit over 4 years.

 

[SecondCor521]

Which leads me to another question, should I bother sending estimated taxes to state for such a sum? we tax at about 6% here in MO, so about $3000. Would that be correct? Sorry, I've only done one other roth conversion in my life, back in 1998. those were the days you could spread the tax hit over 4 years.

It depends on if your state imposes underpayment penalties and whether the cash flow is an issue for you.

In my state (ID), we have no underpayment penalties and cash flow is not an issue, so I just pay all of my state income taxes when I file my tax return (or if I feel fancy and want to earn a few cents of interest then I delay paying until just before 4/15).

I'm sure MO has a way to accept estimated payments if you wanted to make one. Just remember to put it on your return when you go to file

 

[cat4ever]

It depends on if your state imposes underpayment penalties and whether the cash flow is an issue for you.

Thanks. After a quick search, yes they do. Looks roughly like if you have less than 80% of your total yearly tax withheld you'll get hit with a 2.3% tax on the underage (is that a proper use of that word?).

The conversion will likely make about $1500 subject to the penalty, so I think I'll be filing an estimated tax form by Jan. 15. Interestingly I will gain access to my rule of 55 401K funds right about then, so I can use those, which would generate more taxes owed for 2021 (and I don't mean to start a thread about the best time to take funds from your 401K throughout the year here). Welcome to retirement I guess .

https://dor.mo.gov/forms/MO-2210_2018.pdf
https://dor.mo.gov/forms/MO-1040ES_2020.pdf

 

[Out-to-Lunch]

Interestingly I will gain access to my rule of 55 401K funds right about then, so I can use those,

Okay, this statement makes me very nervous (for you). Are you 55 now? Or are you turning 55 in January?

I believe you separated from work in 2020. If you won't turn 55 until 2021, my understanding is that the Rule of 55 is not operative for you.

 

[cat4ever]

I'm haven't officially separated yet. I had about 10 weeks of vacation to burn, which I'm doing now while keeping my health insurance, and then getting paid for the 10 day holiday break. I will officially separate Jan 5 2021, which means I keep my insurance until Jan 31 2021 at which point I'll likely switch to COBRA ($1600/month with dental). I am 56, so I should be good. But thanks for double checking, I wouldn't put those kinds of errors past me

 

[Out-to-Lunch]

I'm haven't officially separated yet. I had about 10 weeks of vacation to burn, which I'm doing now while keeping my health insurance, and then getting paid for the 10 day holiday break. I will officially separate Jan 5 2021, which means I keep my insurance until Jan 31 2021 at which point I'll likely switch to COBRA ($1600/month with dental). I am 56, so I should be good. But thanks for double checking, I wouldn't put those kinds of errors past me

Oh, that is great to hear. I was certainly hoping that my inferences were off-base. When I made that (thankfully incorrect) inference, my heart just sunk...

 

[SecondCor521]

I'm haven't officially separated yet. I had about 10 weeks of vacation to burn, which I'm doing now while keeping my health insurance, and then getting paid for the 10 day holiday break. I will officially separate Jan 5 2021, which means I keep my insurance until Jan 31 2021 at which point I'll likely switch to COBRA ($1600/month with dental). I am 56, so I should be good. But thanks for double checking, I wouldn't put those kinds of errors past me

You may have said, but why COBRA over ACA? (I went straight from employer HC to ACA when I FIREd in 2016 and it has worked pretty well for me.)

 

[CardsFan]

Yes, except for the exact sums, it's exactly as pb4... has described. I have since deposited into the Roth the exact amount that was withheld and sent to the IRS, using post tax money from my bank account. The exact sums are 50k converted for which I had 22% withheld, which I believe is the tax bracket the money will be taxed at.

Which leads me to another question, should I bother sending estimated taxes to state for such a sum? we tax at about 6% here in MO, so about $3000. Would that be correct? Sorry, I've only done one other roth conversion in my life, back in 1998. those were the days you could spread the tax hit over 4 years.

Thanks. After a quick search, yes they do. Looks roughly like if you have less than 80% of your total yearly tax withheld you'll get hit with a 2.3% tax on the underage (is that a proper use of that word?).

The conversion will likely make about $1500 subject to the penalty, so I think I'll be filing an estimated tax form by Jan. 15. Interestingly I will gain access to my rule of 55 401K funds right about then, so I can use those, which would generate more taxes owed for 2021 (and I don't mean to start a thread about the best time to take funds from your 401K throughout the year here). Welcome to retirement I guess .

https://dor.mo.gov/forms/MO-2210_2018.pdf
https://dor.mo.gov/forms/MO-1040ES_2020.pdf

I live in MO as well.

Last year I did my conversion late in the year, paid estimated to both state and feds and filed form 2210 for the feds Using TurboTax. Interestingly, MO-2210 never popped up in TT, so I ended up paying a penalty to MO.

I guess I could file an amended return, but the penalty was small. Not worth the effort.

This year I paid estimated taxes covering 100% of last year's taxes, so I should not have the problem, but if I do, I will make sure to find and file the MO-2210 form.

Thanks

EDIT to add: My error. Went back and checked. I DID file MO-2210. Still had a penalty because I only paid 100% of the previous year's taxes, had a penalty on the shortfall. Live and learn.

 

[calnomore]

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.

Has anyone done this?
I talked with three people at Schwab where my accounts are. I kept getting passed to someone that knew more. I was told I could convert, withhold the taxes and rollover that amount into the tIRA (where the funds came from) but not into the Roth.
Very confused.

 

[pb4uski]

I haven't, but cat4ever did recently. You may have to escalate it.

https://www.early-retirement.org/forums/showthread.php?p=2528016

 

[Drewskers]

^^^ Actually now that you mention it I have never done withholding on a Roth conversion with Vanguard, only on tIRA withdrawals.

Vanguard has no option to withhold taxes on tIRA -> ROTH conversions. (I just did one).

 

[CRLLS]

Has anyone done this?
I talked with three people at Schwab where my accounts are. I kept getting passed to someone that knew more. I was told I could convert, withhold the taxes and rollover that amount into the tIRA (where the funds came from) but not into the Roth.
Very confused.

I would think you could then just do a 2nd Roth Conversion from the tIRA to the Roth in the same amount, no?