Quick Roth Conversion Tax ?

[cat4ever]

Greetings List,

I stupidly had E+Trade withhold taxes when I did a recent direct ROTH conversion from my E*Trade tIRA to E*Trade Roth. Per the below IRS page It sounds like I should be able to add the withheld amount to my Roth from other sources to avoid the tax and penalty on money E*Trade sent to the IRS. Am I missing anything? Thank you in advance.

Supporting documentation:

https://www.irs.gov/retirement-plan...vers-of-retirement-plan-and-ira-distributions

The example they give (below) is for a 401K to IRA rollover, but I'm hoping it covers tIRA to Roth IRA as well...

If you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld.

Example: Jordan, age 42, received a $10,000 eligible rollover distribution from her 401(k) plan. Her employer withheld $2,000 from her distribution.

If Jordan later decides to roll over the $8,000, but not the $2,000 withheld, she will report $2,000 as taxable income, $8,000 as a nontaxable rollover, and $2,000 as taxes paid. Jordan must also pay the 10% additional tax on early distributions on the $2,000 unless she qualifies for an exception.
If Jordan decides to roll over the full $10,000, she must contribute $2,000 from other sources. Jordan will report $10,000 as a nontaxable rollover and $2,000 as taxes paid.
If you roll over the full amount of any eligible rollover distribution you receive (the actual amount received plus the 20% that was withheld - $10,000 in the example above):

Your entire distribution would be tax-free, and
You would avoid the 10% additional tax on early distributions.

 

[pb4uski]

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.

60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan (see below), so you’ll have to use other funds to roll over the full amount of the distribution.

 

[cat4ever]

Thank you, I feel much better now, and as usual your response is right on and to the point. And thanks for all the input you have on these boards, I always pay close attention to your posts.

And yeah, the conversion was done only a week ago, so I'll get the funds added to the ROTH (not the tIRA) today.

 

[pb4uski]

Coordinate with ETrade to make sure that they code your deposit as a rollover contribution and not as a regular contribution to avoid the penalty.

 

[sengsational]

I was pleased by the Fidelity rep when I called (yes, called, because the online didn't have the option for 'in-kind') and she said something like "I know you don't want withholding, but I have to ask"

 

[cat4ever]

HA, yeah, wish I'd have done the same. The default on the online form was actually NOT to do withholding, but I changed it. My thinking was surely the tax withholding wouldn't be penalized, then after the fact I looked it up. Obviously due diligence isn't my strong suit. Luckily there was a back door escape which I just completed going through by calling E*Trade and making sure the deposit was coded correctly (thanks again pb4uski). I've also copied and pasted how to report on my taxes forms (pasted below in case anyone else gets in the same boat) so I should be good.

ROTH CONVERSION WITHHOLDING REPLACEMENT:
https://finance.zacks.com/funds-out-ira-can-repay-before-year-out-penalty-6981.html
Tax Reporting
Even though you're repaying the money back into the same IRA and won't owe the IRS any money, you still have to report it on your taxes. Plus, you can't use the short form, the 1040EZ. You must use either Form 1040A or Form 1040. On Form 1040A, the total distribution goes on line 11a and the amount you didn't roll over, if any, goes on line 11b. For Form 1040, the total distribution goes on line 15a and the amount you didn't roll over, if any, goes on line 15b.

 

[Jerry1]

I’m assuming the OP is under 59.5 and trying to avoid the 10% penalty. Either way, this thread brings up an issue I just did with my ROTH. I converted from my IRA to my ROTH and I did want withholding taken. Which happened. I knew it would put less money to work in my ROTH, but I didn’t want to deal with estimated taxes so I did the withholding.

So my question is, can I pay the amount that was withheld into my ROTH? I am over 59.5. I know this wouldn’t be much different than just doing estimates, but for a one off, like it was this year, it’s easier to just send a check to my custodian than to deal with estimates (the IRS).

 

[pb4uski]

Yes, if you're still in the 60 day window.

 

[Jerry1]

Yes, if you're still in the 60 day window.

Thanks. That might also be a strategy for someone to take advantage of the withholding being considered paid throughout the year.

 

[pb4uski]

Yes, absolutely. I recently did a tIRA withdrawal with 99% withholding and wish that I had thought of that.

 

[cathy63]

... I've also copied and pasted how to report on my taxes forms (pasted below in case anyone else gets in the same boat) so I should be good.

ROTH CONVERSION WITHHOLDING REPLACEMENT:
https://finance.zacks.com/funds-out-ira-can-repay-before-year-out-penalty-6981.html
Tax Reporting
Even though you're repaying the money back into the same IRA and won't owe the IRS any money, you still have to report it on your taxes. Plus, you can't use the short form, the 1040EZ. You must use either Form 1040A or Form 1040. On Form 1040A, the total distribution goes on line 11a and the amount you didn't roll over, if any, goes on line 11b. For Form 1040, the total distribution goes on line 15a and the amount you didn't roll over, if any, goes on line 15b.

Those instructions are for some prior year. There is no longer a 1040EZ or 1040A. For 2020, IRA distributions will go on lines 4a and 4b of the 1040 or 1040-SR.

 

[cat4ever]

I’m assuming the OP is under 59.5 and trying to avoid the 10% penalty. Either way, this thread brings up an issue I just did with my ROTH. I converted from my IRA to my ROTH and I did want withholding taken. Which happened. I knew it would put less money to work in my ROTH, but I didn’t want to deal with estimated taxes so I did the withholding.

So my question is, can I pay the amount that was withheld into my ROTH? I am over 59.5. I know this wouldn’t be much different than just doing estimates, but for a one off, like it was this year, it’s easier to just send a check to my custodian than to deal with estimates (the IRS).

Yes, I'm under 59 1/2 and I thought I had screwed up and was trying to avoid the penalty. But as you point out, the way I did it ended up probably being the best approach from the start. Wish I could say "I meant to do that", but sometimes even a blind pig finds an acorn.

 

[npage]

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.

 

[Jerry1]

Yes, that’s how it works. However, the withholding does not have to be 20%. You select any amount you want in order to match your actual tax situation. I take out of my IRA to the top of the 12% bracket, so I have 12% withheld.

I also have State tax withheld. 4.25% in Michigan.

 

[pb4uski]

^^^ 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.

 

[npage]

That makes sense. So say convert $10,000 no witholding. Figure out actual tax of say $1328.73 and simply pay that from taxable to IRS before tax time. Assuming you did not make advance payment is there a penalty if you just wait, or does it depend on total taxes owed?

 

[sengsational]

My process is to get the tax software around Black Friday, do my taxes with estimates in early December to hone in on the conversion amount, convert without withholding, and fill out and mail estimated taxes for federal and state for the amounts calculated by the tax software. This is the only estimated tax payment I make, so I have to say "calculate the penalty", then fill out the "excuse" form to avoid the penalty. The state, NC, has tried to penalize me, but they call off the dogs if you fill out a form after they assess the penalty. I didn't see a way to alert them in advance that I had no tax liability before made the conversion.

 

[pb4uski]

That makes sense. So say convert $10,000 no witholding. Figure out actual tax of say $1328.73 and simply pay that from taxable to IRS before tax time. Assuming you did not make advance payment is there a penalty if you just wait, or does it depend on total taxes owed?

It depends ... if from other activities you are overwithheld then it offsets.

I should have mentioned in the prior post, the slight advantage to the approach where you make a rollover contribution for the taxes withheld is that the IRS considers taxes withheld as paid evenly throughout the year when it comes to calculating underpayment penalties, even if the withholding was on December 31.

 

[pb4uski]

My process is to get the tax software around Black Friday, do my taxes with estimates in early December to hone in on the conversion amount, convert without withholding, and fill out and mail estimated taxes for federal and state for the amounts calculated by the tax software. This is the only estimated tax payment I make, so I have to say "calculate the penalty", then fill out the "excuse" form to avoid the penalty. The state, NC, has tried to penalize me, but they call off the dogs if you fill out a form after they assess the penalty. I didn't see a way to alert them in advance that I had no tax liability before made the conversion.

I had the same situation with Vermont... they have no equivalent to 2210 AI for federal... so they would send me a letter, I would send them a letter and then have a nice chat with a lady who would tell me that I was all set. I kidded with her that it was my annual call to her... she understood.

 

[npage]

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?

 

[GreenER]

^^^ 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.

 

[pb4uski]

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.

 

[pb4uski]

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.

 

[CRLLS]

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.

 

[gauss]

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.

-gauss