Quick Roth Conversion Tax ?

[CRLLS]

Quote:

Originally Posted by cat4ever 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.

We were discussing Roth "Conversions". As you noted, the 1 per year does not apply to Roth Conversions. I seem to recall I did this last year. one Roth conversion and then another smaller one when I had a better handle on my income.

[cat4ever]

Quote:

Originally Posted by CRLLS the 1 per year does not apply to Roth Conversions.

Ah, that's right. I've read all this, but it's hard to keep it all straight. So many rules. Thanks for the clarification.

[pb4uski]

Quote:

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

Not true... you can but you have to call in... you just can't do it online. I suspect that they do that so they can counsel you that it is better to pay the tax from taxable account money.

From their website if you are doing a Roth conversion and want withholding:

Quote:

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.

[calnomore]

You can do it either way on Schwab's website.

[pc95]

I'm under 59.5 a bunch and am interested in doing Roth Conversions earlier. I'm 15 years away from 59.5. I've run some numbers and believe that there will be enough average compounding savings rate to outdo the possible tax decrease in the future if a lower bracket. Also thinking the tax rate tide will go up for most in the mid-term future. Also throw in 2 modest pensions/2 social securities, believe we will only be in the lower (possibly 12%) tax tier for a small portion. However do not know what the brackets will be, and the lower bracket upper-bound will very likely be higher due to inflation. Right now is at least 4% lower than years past. However there is an inflation factor of the dollars themselves - dollars 15 years in the future are less valuable than today by one chart at about 33%. I think of it as a calculated risk.

Does the 80% underpayment penalty apply to only the conversion or just your whole taxes that you file.

I'm expecting several thousand overpayment federal, and wanted to do a conversion to match the $3-4000 in feds and less so in CA State.

[cathy63]

Quote:

Originally Posted by pc95 Does the 80% underpayment penalty apply to only the conversion or just your whole taxes that you file. I'm expecting several thousand overpayment federal, and wanted to do a conversion to match the $3-4000 in feds and less so in CA State.

The underpayment penalty applies to the portion of the taxes that were not paid in a timely fashion, but only if you actually owe a penalty, which is pretty easy to prevent.

First, figure out the safe harbor based on last year's taxes -- look at your 2019 tax return and locate your AGI and your total tax. If your AGI is over $150K, then take the total tax and multiply by 1.1. If your AGI is less than $150K, just take your total tax.

Next, look at your 2020 withholding from your most recent paycheck stub. Is this amount greater than the safe harbor you just calculated? If so, there will be no Federal penalty, no matter how much you convert from your Roth IRA.

If you are not already in a safe harbor, then in early January, take a look at your withholding on your final pay stub for the year. Subtract the 2020 withholding from your safe harbor amount and pay that difference to the IRS on January 15. You can do it online from this page: https://www.irs.gov/payments

If you use a safe harbor, then you will still owe income tax on the Roth IRA conversion, but it will just be figured on your 2020 tax return and there will be no penalty.

The exception is if you had unusually high income in 2019, with unusually high taxes, so reaching the safe harbor would require you to pay much more than you'd likely end up owing in 2020. If that's the case, then the easiest thing to do is just pay the approximate tax on the conversion on January 15. You can figure it based on your filing status and AGI, but for most people, paying 20% would be enough to eliminate the penalty.

In either case, if you make an estimated tax payment on January 15, you may have to fill out Form 2210 in order to show the IRS that you had a lot of income in Q4 and therefore don't owe a penalty.

You can do the same for CA, but state tax rates are a lot lower, and the penalties are a lot smaller. If you're married, then probably most of your conversion is in the 6% or 8% brackets, maybe reaching into the 9.3% bracket. You could make a payment of 7% and be pretty safe.

[pc95]

Quote:

Originally Posted by cathy63 The underpayment penalty applies to the portion of the taxes that were not paid in a timely fashion, but only if you actually owe a penalty, which is pretty easy to prevent. First, figure out the safe harbor based on last year's taxes -- look at your 2019 tax return and locate your AGI and your total tax. If your AGI is over $150K, then take the total tax and multiply by 1.1. If your AGI is less than $150K, just take your total tax. Next, look at your 2020 withholding from your most recent paycheck stub. Is this amount greater than the safe harbor you just calculated? If so, there will be no Federal penalty, no matter how much you convert from your Roth IRA. If you are not already in a safe harbor, then in early January, take a look at your withholding on your final pay stub for the year. Subtract the 2020 withholding from your safe harbor amount and pay that difference to the IRS on January 15. You can do it online from this page: https://www.irs.gov/payments If you use a safe harbor, then you will still owe income tax on the Roth IRA conversion, but it will just be figured on your 2020 tax return and there will be no penalty. The exception is if you had unusually high income in 2019, with unusually high taxes, so reaching the safe harbor would require you to pay much more than you'd likely end up owing in 2020. If that's the case, then the easiest thing to do is just pay the approximate tax on the conversion on January 15. You can figure it based on your filing status and AGI, but for most people, paying 20% would be enough to eliminate the penalty. In either case, if you make an estimated tax payment on January 15, you may have to fill out Form 2210 in order to show the IRS that you had a lot of income in Q4 and therefore don't owe a penalty. You can do the same for CA, but state tax rates are a lot lower, and the penalties are a lot smaller. If you're married, then probably most of your conversion is in the 6% or 8% brackets, maybe reaching into the 9.3% bracket. You could make a payment of 7% and be pretty safe.

Thanks, there's no current AGI limit for tIRA -> rIRA conversions right?

[cat4ever]

Quote:

Originally Posted by pc95 Does the 80% underpayment penalty apply to only the conversion or just your whole taxes that you file. I'm expecting several thousand overpayment federal, and wanted to do a conversion to match the $3-4000 in feds and less so in CA State.

I’m assuming it would be taxes for the year since it’s being done in the last quarter. The 80% is roughly the MO line, but they have some safe harbor amount too that I’m too lazy to calculate. I’m not sure what the line is for federal taxes.

[SecondCor521]

Quote:

Originally Posted by pc95 Thanks, there's no current AGI limit for tIRA -> rIRA conversions right?

Correct. You just have to be willing to pay the resulting income taxes.

(There are other restrictions, like you can't use SEPP distributions or RMDs from an IRA to convert to a Roth, stuff like that.)

[cb2008]

How have you funded your Roth conversions, in kind or liquidate stocks and fund with cash?
What are the pros and cons of each, specially at Fidelity?

[pb4uski]

My Roth conversion have always been "cash"... redeem mutual fund shares, transfer cash and then purchase mutual fund shares but in one exchange transaction.... in substance the same as an in-kind transfer since I purchased the same ticker and the redemption price and the purchase price were identical.

[CRLLS]

When I do a Fidelity IRA to Fidelity Roth conversion, it is automatically done "in kind". At least it appears that way in my holdings. Even the cost basis carries over. I have not actively selected it to be done that way. What their internal process is, I don't know. AFAIK, it is may done as pb4uski says.

[fritz]

Quote:

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

Quote:

Originally Posted by pb4uski Not true... you can but you have to call in... you just can't do it online. I suspect that they do that so they can counsel you that it is better to pay the tax from taxable account money. From their website if you are doing a Roth conversion and want withholding:

We have Vanguard regular mutual fund accounts (old style) and not a Brokerage Account (new style). We can do Roth conversions from our Rollover IRAs to our Roths, and we can select the tax withholding percentages online without having to call and get someone to assist with the transaction. I called yesterday to verify this was still the case. Do you have a Brokerage account?

I plan on doing Roth conversions with Vanguard starting this year. Will continue doing them even after RMDs kick in for both of us, until there's no more room within our desired tax bracket for Roth conversions (hopefully never if we do this right).....

On my call with Vanguard, I asked about doing a Roth conversion online and selecting/having Vanguard withhold Federal taxes. I also also asked about allowing me to put that tax amount into our Roth accounts within the 60 day window of the conversion (allowed Federal tax rule?).

The person I asked was not familiar with my requested transaction style (we are Flagship, and was talking to a Flagship Rep in retirement accounts - scary, right?). Anyway, she put me on hold to obtain my information.

• She came back and stated that we could do one or more Roth conversions during the year online, and select the Federal tax percentage to have Vanguard withhold Federal taxes (a DIY conversion online).

• We could also put the Federal tax withheld amount into our Roth accounts within the 60 day window of the conversion, with funds obtained from our bank account (again, allowed Federal tax rule?)

This would be desirable for us as I see it....

• My understanding (from this thread) is that if Vanguard withholds Federal taxes, the Feds consider that payment spread out over the entire year.

• This would eliminate paying estimated Federal taxes, and any year end tax (Form 2210) for uneven income to avoid any possible quarterly penalties.

• We could just put the Federal tax withheld amount on any Roth conversion in the Roth account within the 60 day window (allowed Federal tax rule?).

Of course Vanguard cannot give advice on tax related matters (probably all of them this way). What I would like to ask of forum members here, is to provide a reference to the specific Federal tax rules that allow the type of Roth conversion transaction I've described above. According to this thread - some are doing this type of conversion.

[pb4uski]

Quote:

Originally Posted by fritz We have Vanguard regular mutual fund accounts (old style) and not a Brokerage Account (new style). We can do Roth conversions from our Rollover IRAs to our Roths, and we can select the tax withholding percentages online without having to call and get someone to assist with the transaction. I called yesterday to verify this was still the case. Do you have a Brokerage account? ....

Yes fritz, mine is a brokerage account. It's odd/interesting that mutual fund accounts are different.

While I like your strategy of Roth conversion with withholding for taxes and they deposit withheld within 60 days. I initially thought that there would be a constraint that rollover contributions can only be done once every 12 months, but found that constraint doesn't apply to Roth rollovers.

Quote:

Beginning in 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 (Announcement 2014-15 and Announcement 2014-32). The limit will apply by aggregating all of an individual’s IRAs, including SEP and SIMPLE IRAs as well as traditional and Roth IRAs, effectively treating them as one IRA for purposes of the limit. Trustee-to-trustee transfers between IRAs are not limited Rollovers from traditional to Roth IRAs ("conversions") are not limited

[cat4ever]

The part about replacing the withholding I think is covered here:

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

More info on the above here, although slightly out of date:
https://finance.zacks.com/funds-out-...alty-6981.html

Not sure about the part about withholding being considered as distributed throughout the year.

[pb4uski]

Quote:

Originally Posted by cat4ever ...Not sure about the part about withholding being considered as distributed throughout the year.

That is well established. For the purpose of calculating underpayment penalties estimated payments are recognized when paid and withholdings are presumed to be evenly spread throught the year.

[cat4ever]

Quote:

Originally Posted by pb4uski That is well established. For the purpose of calculating underpayment penalties estimated payments are recognized when paid and withholdings are presumed to be evenly spread throught the year.

Yes, I agree it's well established. the part I wasn't sure about was a link to the specific IRS code that spells it out.

[pb4uski]

From Form 2210 instructions:

Quote:

...For withheld federal income tax..., you are considered to have paid one-fourth of these amounts on each payment due date unless you can show otherwise. ...

[fritz]

Quote:

Originally Posted by pb4uski Yes fritz, mine is a brokerage account. It's odd/interesting that mutual fund accounts are different. While I like your strategy of Roth conversion with withholding for taxes and they deposit withheld within 60 days. I initially thought that there would be a constraint that rollover contributions can only be done once every 12 months, but found that constraint doesn't apply to Roth rollovers.

Quote:

Originally Posted by cat4ever The part about replacing the withholding I think is covered here: https://www.irs.gov/retirement-plans...-distributions More info on the above here, although slightly out of date: https://finance.zacks.com/funds-out-...alty-6981.html Not sure about the part about withholding being considered as distributed throughout the year.

Thank you both for the quick responses.

My (apologize) long post was to explain that after reading this thread - I thought that having Vanguard do the Federal withholding was a great way to avoid -

• Paying estimated quarterly taxes.
• Filing a year end Form 2210 for uneven income throughout the year to possibly avoid any quarterly taxes.

I find the 1-step extra process of paying back the taxes within the 60 day window into the Roth conversion with Vanguard, better than the 2-step process of the bullet points mentioned.


I deal with the State of Illinois with estimated taxes and filing IL2210 over the last 11 years of retirement. It has not always gone well, and the process is a royal pain in the butt should you have an issue. It has taken until November of the current year to straighten out the previous tax year with Illinois (their error, my responsibility to fix).


My concept relies on the Fed's considering any taxes paid by Vanguard on my behalf for Roth conversions done at any time of the year, to be considered spread out over the entire 12 months of that year. Vanguard just tells me to consult with a tax advisor....

[sengsational]

I like "the fritz method". I wish I'd thought if it.