Roth conversion tax withholding "true up" question

[Gee1234]

First post from a long time lurker/learner. Thank you for all the great advice over the last few years as I launched into retirement.

I did my first Roth conversion over the last week, not a fast process at Vanguard. I withheld fed and state taxes as some here have suggested to cover expected amount due in 2020. Since we have no income other than dividends and capital gains (I am 59 and wife is 60) I had to wait until estimated year end distributions were released. Did not do estimated quarterly withholdings during year as I always expected to withhold from an IRA distribution at years end.

Round numbers to talk this through. Rollover $50,000, withheld Fed $5,000 and State $1,000. So in this example $44,000 went into the Roth.

So my question is can I take $6,000 of non IRA/401k money and transfer it into the Roth at this point to maximize my tax free growth in the future? I would call it a "true up" to get the Roth back to $50,000 but not sure if this is the right nomenclature.

I can't seem to find this scenario after Google searching. Hopefully there is an IRS website expert that can reference some documentation either saying this is OK or nope, can't be done.

Thanks in advance

 

[RunningBum]

I think you can. This is called an indirect rollover. I'm assuming you can do a partial indirect rollover on the part that was withheld when you did a direct rollover on the rest.

https://www.investopedia.com/how-to-do-a-rothira-rollover-4770219

...
Roth IRA Rollover Methods

...

With an indirect rollover, you receive a distribution from your traditional IRA. You then have 60 days to deposit it into your Roth IRA.


Converting from a 401(k)


... If your company issues the check to you, it must withhold 20% of the account balance for tax purposes.
Then, you’ll have just 60 days to deposit all the money into a new Roth account—including the 20% that you didn’t receive. Miss the deadline and any money not rolled over to a Roth IRA will be subject to a 10% early withdrawal penalty if you're younger than 59 ½. And you'll still be on the hook for income taxes on the entire converted amount.

Judge for yourself if this article is correct and applies to your situation. I think it probably does, but it's no skin off my back, so do your own verification.

You said you are 59. Are you 59.5? If not, note the early withdrawal penalty if you don't or aren't able to put the withheld amount in your Roth.

Btw I just did a Roth conversion a few days ago and found it very quick and easy. Not sure what you ran into that made you think it wasn't. I've never had taxes withheld from my conversion. Maybe that was your issue.

 

[DINKFIRE]

I think your question is if you can contribute additional $6000 to Roth if your only income is from 401K conversion to Roth and investment income. You can review the link below to IRS publication
https://www.irs.gov/publications/p590a#en_US_2019_publink1000230364

under general limit section. From my reading you will need taxable compensation to make additional contribution.

 

[Gee1234]

Thank you for the reply!

Rollover was for wife's IRA and she is 60.

Regarding the time it took to do the rollover and hoping this helps others, I could not do the transfer online due to the tax withholdings. Here is the timeline...

Mon 12/21 - Found out online I couldn't do tax withheld Roth conversion online. Called Vanguard in afternoon and found out doing tax withheld transfer must be done on phone (long hold but not unexpected as this is end of year, no complaint, see below.) Since IRA is in a brokerage account needed to first transfer $6,000 to settlement fund to cover taxes, done by rep, told should be ready Tuesday...
Tues 12/22 - Called at 8AM (suggested by rep, cut hold time from long on Monday to 0 min ) Rep filled in his form to do the transfer but for some reason couldn't be done yet even though tax withholding amount was in settlement fund. Wife digitally signed document for conversion with withholding but was told need to call in Wednesday to execute.
Wed 12/23 - Called at 8AM, again no wait, got the same rep as Tues and he remembered everything, bonus! At this point transfer paperwork was executed by rep.
Mon 12/28 - $6,000 was gone from tradition IRA settlement account, $44,000 still in trad IRA.
Tues 12/29 - $0 in Trad IRA, $44,000 in Roth IRA. Still a tag of "Pending Transfer" but looks like all is well. One confirmation pdf showing transfer of $44,000 but no document yet showing taxes paid.

So far a week, almost done.

 

[SecondCor521]

Yes, you can do as described. I have learned on other threads that you want to ensure that the second $6,000 is coded as an indirect rollover so that it is treated properly for tax purposes.

As an alternative option, next time you could just roll over the entire $50K directly and then use your "other" $6K to make an estimated tax payment by Jan 15. While it depends on your tax situation throughout the whole year, as long as your Roth conversion and tax payment all happen in the fourth period, there should be no to to little underpayment penalty. You may need to fill out Form 2210 Schedule AI.

 

[pb4uski]

Just keep in mind that these 60-day rollover contributions can only be done every 12 months so it's probably not an ideal way to do it.

https://www.irs.gov/retirement-plans/ira-one-rollover-per-year-rule

 

[Gee1234]

Thank you pb4uski for reminding me about the 12 months. This year only my wife is 59 1/2 + and we are converting her only two traditional IRAs to Roths, taking the taxes from one. Her other retirement savings are in a 401k and we are not messing with that yet. Next year I will be 60 and we will be Roth converting some of my Traditional IRA money. Then I thought it would be simplest to pay the taxes with a separate traditional IRA withdrawal all to taxes in December and not mess with the estimated taxes and folks on this site say paying estimated taxes is not difficult. May rethink that as we have plenty of outside $ to pay taxes.

Also thank you SecondCor521, based on your answer I went to the Vanguard site and tried to dry run move the $6,000 back into the Roth. I clicked the "buy and sell -> contribute to IRA" and there was the "is this a rollover from an IRA" check box which I expect would properly code the rollover. Problem is that if I tried to get the money from our Vanguard outside investment settlement fund it popped me into "Exchange Vanguard Funds". This did not give me the option of saying this was a rollover. Will need to call Vanguard in the morning to see if they can get the coding right on there end, just as I had to go through them for the case of withholding taxes on a Roth conversion.

I really appreciate the comments. We use to call this a "chalk talk" back in my engineering days where we would throw around ideas on a chalk board. Always good to look at all the angles.

 

[RunningBum]

You don't have to be 59 1/2 to do Roth conversions. It's just that if you have taxes withheld and don't "true up" the conversion, you have to pay a penalty for an early withdrawal.

Given all that you are going through, I will definitely continue to not do withholding on my conversions. I try to estimate my taxes at the start of the year, or use safe harbor, and make 4 equal payments. If I have to increase them later in the year I do it, and fill out form 2210 with taxes if necessary. I don't pay much in taxes so it's not a big deal if I'm paying in the first 3 quarters and withdrawing in the 4th.

 

[pb4uski]

.... Also thank you SecondCor521, based on your answer I went to the Vanguard site and tried to dry run move the $6,000 back into the Roth. I clicked the "buy and sell -> contribute to IRA" and there was the "is this a rollover from an IRA" check box which I expect would properly code the rollover. Problem is that if I tried to get the money from our Vanguard outside investment settlement fund it popped me into "Exchange Vanguard Funds". This did not give me the option of saying this was a rollover. Will need to call Vanguard in the morning to see if they can get the coding right on there end, just as I had to go through them for the case of withholding taxes on a Roth conversion. ...

Couldn't you just sell shares or funds so that you have $6,000 in your settlement account and then do what you were doing to contribute to an IRA and mark it as a rollover?

 

[Gee1234]

Couldn't you just sell shares or funds so that you have $6,000 in your settlement account and then do what you were doing to contribute to an IRA and mark it as a rollover?

The $6,000 is already in the settlement account of our outside IRA money, from distributions in the last few weeks. Even so I still had the situation I described above where it directed me to "exchange Vanguard funds" instead of "contribute to IRA" which doesn't have the check box for "this is an IRA rollover."

As an aside I transferred all our Vanguard holdings to brokerage back in January to not have multiple 1099s this year. Learned to do that on this site. Have found that there are strange little issues that crop up when dealing with a brokerage account that I never saw before with plain mutual funds. Specifically when dealing with RMDs for my mother and as I described above that I couldn't just get the tax withholdings held until I moved that money into the traditional IRA settlement fund first. Two step operation, not a big deal but requires at least an extra day to sell mutual fund and get $$ into settlement fund. Live and learn.