Quick Roth Conversion Tax ?

[npage]

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?

 

[Jerry1]

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.

 

[misanman]

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/article/4393993-chasing-tax-rabbit-around-roth

 

[pb4uski]

Interesting, an non-IRS example I saw said 6 months, but I would go with 183 days to be safe.

 

[pb4uski]

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

http://https://seekingalpha.com/article/4393993-chasing-tax-rabbit-around-roth

No idea.. and link doesn't work.

 

[cathy63]

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.

 

[Animorph]

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

http://https://seekingalpha.com/article/4393993-chasing-tax-rabbit-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.

 

[GreenER]

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!

 

[pb4uski]

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

 

[Jerry1]

^^^ 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.

 

[pb4uski]

Jerry, you piqued my curiosity so I started to do a Roth conversion on vanguard.com and ran into this...

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.

 

[Jerry1]

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.

 

[pb4uski]

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.

 

[GreenER]

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.

 

[gauss]

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.

-gauss

 

[gauss]

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?

Ok - Just be sure to do your small 'educational' conversion in a different/prior tax year than the larger conversions.

You will get feedback when you file your taxes (via your tax software) if any of your assumptions were wrong.

You really can't do this ahead of time because you don't know for sure how your custodian will code box 7 of your 1099-R.

-gauss

 

[npage]

Ok - Just be sure to do your small 'educational' conversion in a different/prior tax year than the larger conversions.

You will get feedback when you file your taxes (via your tax software) if any of your assumptions were wrong.

You really can't do this ahead of time because you don't know for sure how your custodian will code box 7 of your 1099-R.

-gauss

I will be pulling plug next year at which point I will roll my 401K to a Vanguard IRA, but will not have tax room for any large conversions. So I will just do $500.00 Roth conversion for education. 2022 is 1st year I am thinking for larger conversion.

I use turbotax.

 

[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.

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.

Does this pertain to your option?

Rollover Frequency Limitations.
The IRS places limits on how often you can roll over money from a particular IRA. Once an IRA has been involved in a rollover, you can't initiate a rollover from that IRA for 12 months.

 

[pb4uski]

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

 

[sengsational]

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

Precisely what I was thinking when the 183/182 discussion was going on.

Usually they had me on production line kinds of programming tasks, but one time they had me on getting data on tax forms. I came across one of these "edge cases" as we liked to call them, but staffing, as it was, nobody could answer my question before the deadline. I remember programming it both ways and hard coding a boolean. In the end, nobody answered me before the print run, so the decision was made by a lowly programmer!

 

[JoeWras]

Precisely what I was thinking when the 183/182 discussion was going on.

Usually they had me on production line kinds of programming tasks, but one time they had me on getting data on tax forms. I came across one of these "edge cases" as we liked to call them, but staffing, as it was, nobody could answer my question before the deadline. I remember programming it both ways and hard coding a boolean. In the end, nobody answered me before the print run, so the decision was made by a lowly programmer!

What did you decide?!

Geez, you bring back memories. I worked on too many projects where marketing couldn't make up their mind. We had secret files with obscure numbers we'd read in to enable features or characteristics.

If the product became popular enough, nerds would reverse engineer it. We had to put an end to that shoddy practice.

 

[sengsational]

I don't even remember what it was, just that the numbers were different if I interpreted the rules one way vs the other. Not a huge difference for anybody, but different.

As to shoddiness, I cringe when I see the nearly endless list of options when I type " about:config" in the browser address bar. But I fear we have gone on a tangent to a tangent, hehehe.

Back to gause's always excellent observations/suggestions, the idea to do a small trail run is a good one, and what I did back in my younger 59 1/2 days.

 

[JoeWras]

Back to gause's always excellent observations/suggestions, the idea to do a small trail run is a good one, and what I did back in my younger 59 1/2 days.

Yeah, back on topic. Too much w*rk talk there for a second. I also want to give appreciation to gause's idea. Especially if you are early retired, doing just a little bit in the Roth not only gives you a nice trial, it also gets the 5 year Roth timer ticking.

Two years ago I converted just 100 to a Roth. From this I was able to trial and get used to:

• Vanguard's procedures for conversion, including that question about withholding
• Start my Roth timer
• Seeing what forms I get from Vanguard at tax time
• Entering the Roth on my tax program
• Figuring out the taxable vs non-taxable math for my conversion. I have a basis in my tIRA

With just $100, none of this was life shattering should I have made a mistake

 

[npage]

Yeah, back on topic. Too much w*rk talk there for a second. I also want to give appreciation to gause's idea. Especially if you are early retired, doing just a little bit in the Roth not only gives you a nice trial, it also gets the 5 year Roth timer ticking.

I get confused on interpreation of this. Once you do that conversion,, any conversion there after reverts back to that initial conversion date? I am talking about before 59.5 as I realize after 59.5 it does not matter for.

So if I convert $100 in 2021 as a test and I am 47 years old, then in 2022, 2023, 2024 I convert large amounts from Trad. IRA to roth, those large amounts clocks start based on 2021? My undertssanding is before 59.5, each conversion is it's own 5 year clock?

So the 2022 conversion are not available until 2027, 2023 in 2028 etc.

 

[gauss]

^ No

For Roth conversions, each conversion has a separate 5 year clock that you need to be aware of and track if you plan to withdraw the money before age 59 1/2. It sounds like your original understanding is correct.

The other 5-year timer, that you may need to get going, is the time since your first Roth IRA is initially opened.

This may come into play if you are over age 54 1/2 when you open your first Roth IRA. To withdraw earnings tax free, you need to be a) over age 59 /12 AND b) five years must have past since you opened your first Roth IRA (or perhaps qualify for one of the exceptions).


-gauss