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Old 12-15-2020, 08:07 PM   #61
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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.
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Old 12-15-2020, 08:19 PM   #62
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Originally Posted by pb4uski View Post
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.
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Old 12-15-2020, 08:37 PM   #63
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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.
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Old 12-15-2020, 09:58 PM   #64
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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.
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Old 12-15-2020, 10:42 PM   #65
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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
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Old 12-16-2020, 05:57 AM   #66
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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
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Old 12-16-2020, 10:13 AM   #67
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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.
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Old 12-16-2020, 10:20 AM   #68
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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
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Old 12-16-2020, 11:22 AM   #69
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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...
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Old 12-16-2020, 02:44 PM   #70
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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.)
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Old 12-16-2020, 03:55 PM   #71
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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.
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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.
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Old 12-16-2020, 04:44 PM   #72
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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.
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Old 12-16-2020, 06:21 PM   #73
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I haven't, but cat4ever did recently. You may have to escalate it.

https://www.early-retirement.org/for....php?p=2528016
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Old 12-16-2020, 06:30 PM   #74
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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.

Vanguard has no option to withhold taxes on tIRA -> ROTH conversions. (I just did one).
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Old 12-16-2020, 06:36 PM   #75
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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?
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Old 12-17-2020, 09:50 AM   #76
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but why COBRA over ACA?
Good question. Path of least resistance and least effort, along with fear of the unknown. My wife is a doctor snob (probably a good thing actually) so I don't want to upset that apple cart.
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Old 12-17-2020, 09:53 AM   #77
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CardsFan, Thanks for that info. Knowledge from actual experience always helps.
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Old 12-17-2020, 10:03 AM   #78
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Has anyone done this?
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.
At E-Trade there was much confusion on this from the frontline support folks, one even said they didn't think the withholding would be penalized, but they handed me off to the tax and retirement folks and they were confident in what to do. They may have even asked me which account to deposit it into (tIRA vs Roth, which was a no brainer for the Roth for after tax money). They even knew about coding my deposit as part of a rollover within the 60 day window. I talked to two independent folks about it on different days and got the same answer, so feel pretty confident in what I/they did. If something glitches out next year I'll update this thread.
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Old 12-17-2020, 10:06 AM   #79
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Vanguard has no option to withhold taxes on tIRA -> ROTH conversions. (I just did one).
E*Trade had the option, and the default was NOT to withhold, which I changed. They even let me enter the percentage to withhold. As pb4uski noted, the way I ended up doing it may be the best way, especially the part about the withholding being seen as being paid across the entire year, not just the last quarter. As well I think it was slightly easier to do it this way if I don't count the gathering the invaluable information from this board LOL.
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Old 12-17-2020, 10:10 AM   #80
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I would think you could then just do a 2nd Roth Conversion from the tIRA to the Roth in the same amount, no?
You would probably run into this rule...

https://www.irs.gov/retirement-plans...-distributions

You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.

Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own.

The one-per year limit does not apply to:

rollovers from traditional IRAs to Roth IRAs (conversions)
trustee-to-trustee transfers to another IRA
IRA-to-plan rollovers
plan-to-IRA rollovers
plan-to-plan rollovers
Once this rule takes effect, the tax consequences are:

you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months, and
you may be subject to the 10% early withdrawal tax on the amount you include in gross income.
See IRA One-Rollover-Per-Year Rule for more on this limit.
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