Tax Question re: Quarterly estimated tax payments

[Sunset]

.....

I confirmed I could do it two ways: (1) obtain a check from 401k custodian to roll over the funds to a Roth IRA custodian and withhold income taxes of 10-20 percent, deposit check into Roth IRA within 60 days along with the withheld taxs amount from your taxable funds; .....

We did this last year, cashed out an IRA from bank and had them withold the taxes on it.
Then we deposited the money into another bank.
Told that other bank we were transferring the IRA $$ , and had them take the check amount plus the taxes amount and stuff it into a ROTH <edited> account.

It was a pain in the butt due to the phone calls involved, and the small amount of money, and it used up our 1 per year rollover opportunity.

 

[kaneohe]

I'm misunderstanding the issue with the 1099-R. Once you have taken a rollover (and it's considered a distribution when it's a conversion from tIRA to Roth IRa) from a tIRA, isn't a 1099-R always cut and doesn't the 1099 say whether you've had withholding from the distribution/rollover? Whether you transfer amounts withheld is a separate issue, isn't it? I'm not seeing the issue here.

The issue (explained in more detail in post #23) is that the 1099-R might show a gross distribution of e.g. 10K, a taxable amount of 10K , and a 2K withholding. If you replaced the 2K w/h w/ a timely rollover of 2K back into
TIRA, you should only be taxed on the 8K Roth conversion but the 1099R suggests otherwise. I think RB wanted to know how the 1099-R would reflect the correct status and my current thinking is that it won't and you have to explain it.

 

[Sunset]

^^^^^
I think if you take $10K out of an IRA, no matter what you do in the withdrawal process, the tax-ability is still $10K.

If I take $10K out of an IRA , it does not matter if I get $2K for taxes withheld, and $8K in my pocket. Or I get $10K in my pocket.
The taxable amount is $10K.
When I roll that over to ROTH and put in the $10K it does not matter if the money is $10K or ($2K + $8K).

 

[ChrisC]

Hmmm. I guess I’m still misunderstanding the issue. One voluntarily withholds based on an estimate of your entire tax liability. This is true for wage withholding or distributions. I’ve never withheld in the past from Roth conversions as I withheld from my pension, which was sufficient for safe harbor rules.

For 2019, if we do a mega conversion, we’ll be right at the top of the 24% bracket and though I’ve increased pension withholding it might not be enough for safe harbor so at the end of this year we’ll withhold from a conversion to cover
our tax liability for safe harbor purposes. I’m not withholding my liability for the conversion, but for the gap I’m filling for safe harbor purposes.

 

[kaneohe]

^^^^^
I think if you take $10K out of an IRA, no matter what you do in the withdrawal process, the tax-ability is still $10K.

If I take $10K out of an IRA , it does not matter if I get $2K for taxes withheld, and $8K in my pocket. Or I get $10K in my pocket.
The taxable amount is $10K.
When I roll that over to ROTH and put in the $10K it does not matter if the money is $10K or ($2K + $8K).

You are correct here. In the example I used, the rollover was rolled back into TIRA so only 8K should be taxed.

 

[RunningBum]

My issue is the end of the year timing. I like to have all my distributions in hand so I know how to stay off the edge of the ACA cliff, or take it to the top of a tax bracket, out if NIIT, or whatever reason, so it's last December.

Say I convert $100K to my Roth, and ask them to withhold $20K in taxes. Now if I'm a little slow in rolling that $20K back into my tIRA, and don't get to it in January, what is my 1099-R going to show? Do I need to wait for an amended 1099-R, and when will that come? What I need for this to come out as is an $80K Roth conversion, but it's probably going to look like $100K distributed from my tIRA. Would I just need to make sure both steps happen by Dec 31?

I don't know what a 1099-R looks like if I don't convert the whole amount, and I don't know remember what a rollover looks like on it. Maybe it's not as complicated as I think, but making quarterly estimated payments and filing 2210 if needed might be simpler.

 

[ChrisC]

Say I convert $100K to my Roth, and ask them to withhold $20K in taxes. Now if I'm a little slow in rolling that $20K back into my tIRA, and don't get to it in January, what is my 1099-R going to show?

It should show, distribution/conversion of $100K; withholding of $20K. Your form 5498, from the custodian of your Roth, should say conversion amount of $80K unless you add the $20K from your taxable funds, in which case the form 5498 would say $100k as the conversion amount. I'm no expert, but I'm thinking this is the way it should play out.

Do I need to wait for an amended 1099-R, and when will that come? What I need for this to come out as is an $80K Roth conversion, but it's probably going to look like $100K distributed from my tIRA. Would I just need to make sure both steps happen by Dec 31?

Why would the 1099-R need to be amended? it states exactly what occurred: you took/distributed $100K from your account; $80K went to the Roth and $20K went to IRS or the State. Well, conversions are yearly so I think you have to do everything, included rolling over $20K (to replace the $20K withheld, by the end of the year.

I don't know what a 1099-R looks like if I don't convert the whole amount, and I don't know remember what a rollover looks like on it. Maybe it's not as complicated as I think, but making quarterly estimated payments and filing 2210 if needed might be simpler.

Not sure I agree that 2210 filings of estimate taxes are simpler; it seems tax withholding from tIRAs (with conversions) or from any distributions, including RMDs, requires one to just just off a box on the same form you are using to take a distribution or conversion.

 

[RunningBum]

It should show, distribution/conversion of $100K; withholding of $20K. Your form 5498, from the custodian of your Roth, should say conversion amount of $80K unless you add the $20K from your taxable funds, in which case the form 5498 would say $100k as the conversion amount. I'm no expert, but I'm thinking this is the way it should play out.

Why would the 1099-R need to be amended? it states exactly what occurred: you took/distributed $100K from your account; $80K went to the Roth and $20K went to IRS or the State. Well, conversions are yearly so I think you have to do everything, included rolling over $20K (to replace the $20K withheld, by the end of the year.

Except that the net of it all, with the rollover return of $20K to my tIRA, should be a net taxable distribution of $80K out of my tIRA and into my Roth. My tax payment came out of my taxable account since I returned $20K to my [-]Roth[/-]tIRA, but the process makes it count as withholding.

The way you are describing it looks like $100K is taxable, which is not the case after the rollover. That's why I think I would want to see an amended 1099-R.

One or both of us is confused or unclear, which is exactly why I say this looks like it is complicated. Form 2210 is burdensome, but not complicated.

 

[Slow But Steady]

I'm the original poster.

As Kaneohe and others have suggested, I'm taking a crack at filling out the 2210 form. It's actually worse than doing my taxes four times, because when I did the taxes, everything was loaded in automatically.

In contrast, when filling out the 2210 form, I have to go back to each of four separate taxable accounts and recreate each quarter's income. And it has to be categorized as dividends, interest, short term and long term capital gains.

I haven't been able to figure out how to get the capital gains by quarter in the Fidelity account.

This has been a good lesson. Either four equal quarterly payments, or have the taxes withheld from the IRA distributions.

 

[scrabbler1]

I was messing with Form 2210 earlier this year, in case I have to file it. I have my own issues with timing of income as well as how the ACA subsidy interacts with it, so I won't try to hijack your thread.


I will agree that having to determine your ~quarterly income throughout the year along with the taxes due using the QDLTCGW is a major PITA. As or cap gains from Fidelity, they all have a distribution date so you can slot them within the date ranges or each of the 4 ~quarters for income purposes.

 

[Sunset]

I'm the original poster.

As Kaneohe and others have suggested, I'm taking a crack at filling out the 2210 form. It's actually worse than doing my taxes four times, because when I did the taxes, everything was loaded in automatically.

In contrast, when filling out the 2210 form, I have to go back to each of four separate taxable accounts and recreate each quarter's income. And it has to be categorized as dividends, interest, short term and long term capital gains.

I haven't been able to figure out how to get the capital gains by quarter in the Fidelity account.

This has been a good lesson. Either four equal quarterly payments, or have the taxes withheld from the IRA distributions.

You are so brave !!!

This is why I now just pay 1.1x last year tax in 4 installments, so I have the safe harbor.
With the low interest rates, I might overpay but the missed interest is very tiny, and is vastly outweighed by 1 penalty from either the IRS/State.

 

[RunningBum]

You are so brave !!!

This is why I now just pay 1.1x last year tax in 4 installments, so I have the safe harbor.
With the low interest rates, I might overpay but the missed interest is very tiny, and is vastly outweighed by 1 penalty from either the IRS/State.

That can work, if you have pretty consistent income.

In 2016, 2017, 2018, my total taxes were 0, 13842, 34, respectively. Safe harbor was not a good place for 2018.

 

[Lsbcal]

In 2016 someone on the Bogleheads forum mentioned this method of paying taxes if taking RMD's:

Another popular strategy among those taking RMDs is to have 100% of the 2014 tax bill taken out of the December 2015 RMD and forgo the estimated tax payments altogether.

So knowing that the internet was always the truth, that is what I did in 2018 for my first RMD year. So far the IRS has not objected and I filed in mid February.

Anyone see a problem with this approach?

 

[kaneohe]

I'm the original poster.

As Kaneohe and others have suggested, I'm taking a crack at filling out the 2210 form. It's actually worse than doing my taxes four times, because when I did the taxes, everything was loaded in automatically.

In contrast, when filling out the 2210 form, I have to go back to each of four separate taxable accounts and recreate each quarter's income. And it has to be categorized as dividends, interest, short term and long term capital gains.

I haven't been able to figure out how to get the capital gains by quarter in the Fidelity account.

This has been a good lesson. Either four equal quarterly payments, or have the taxes withheld from the IRA distributions.

I'm assuming ? that this was written after my PM to you re: post 14 in this thread? If so, I didn't do a good job writing it or you did not do a good job reading it. That post only requires you to fill out Pt I of the 2210 and the simple wksht listed. It does not require you to fill out Sch AI. If you meet the condition of having paid 80% of your taxes thru w/h and est. taxes by mid Jan 2019, you qualify for a waiver of penalty.....for that year only....a one time gift to you.

Glad you learned your lesson tho about the equal quarterly payments or w/h
for normal yrs. Not the only way to do things but sure makes life simpler.
Lessons learned the hard way stick w/ you longer too so some good came out
of it

 

[Slow But Steady]

I'm assuming ? that this was written after my PM to you re: post 14 in this thread? If so, I didn't do a good job writing it or you did not do a good job reading it.

I think I have to take the blame, along with my H&R Block tax software.

I opened my tax return, then searched for form 2210. When I opened the form in the tax software, I didn't notice that it said page 4, and it did say part I at the top of all that business about the quarterly incomes. I have now googled the form, and I can see what you were talking about.

Oh, well. Now I have a better understanding of the whole process.

 

[kaneohe]

Except that the net of it all, with the rollover return of $20K to my tIRA, should be a net taxable distribution of $80K out of my tIRA and into my Roth. My tax payment came out of my taxable account since I returned $20K to my Roth, but the process makes it count as withholding.

The way you are describing it looks like $100K is taxable, which is not the case after the rollover. That's why I think I would want to see an amended 1099-R.

One or both of us is confused or unclear, which is exactly why I say this looks like it is complicated. Form 2210 is burdensome, but not complicated.

I think we are confusing ourselves because the conditions we use changes from post to post. In your first paragraph here, you seem to have returned the 20K to first the TIRA but later the Roth. Perhaps just the fingers got confused because I know you are thinking TIRA.

Perhaps you are placing too much emphasis on having a "correct" 1099R.
I think I remember in the old days when you could recharacterize conversions.
Say convert 100K in 2016 and recharacterize 20K in 2017. Assume you had non-deductible contributions so you had to use F8606. The instructions say to only enter the net conversion 80K as a starting pt even if you did the recharacterization after 2016 in early 2017. You did not receive a corrected 2016 1099R to reflect that so you had to write a narrative that described what you had done.

To me this recharacterization is similar to the rollover and I'm guessing that it would be treated similarly so that even if the rollover back to TIRA were done the next yr, it would be treated the same as if done the same yr. I'm also guessing that the 1099R would not be amended since it does describe the withdrawal correctly. There is not a "net withdrawal".........there is the original withdrawal described correctly in the 1099R and then a rollover described in the 5498.......that's why you need the narrative description to tie things together.

The 1099R is not a definitive document to describe the tax consequences of a withdrawal. Even tho there is a box 2a that gives a taxable amount, there is also a box2b (taxable amount not determined) that should almost always (if not always) be checked.............the custodian does not know if you are going to do a 60 day rollover, if you have non-deductible contributions, are doing a QCD, etc.

 

[kaneohe]

I think I have to take the blame, along with my H&R Block tax software.

I opened my tax return, then searched for form 2210. When I opened the form in the tax software, I didn't notice that it said page 4, and it did say part I at the top of all that business about the quarterly incomes. I have now googled the form, and I can see what you were talking about.

Oh, well. Now I have a better understanding of the whole process.

Do you qualify for that waiver? Doesn't that get you off the hook for paying the penalty?

 

[bingybear]

It's better to pay taxes from outside the conversion (from your taxable account) than from the conversion. This was if you convert $10K, $10K moves over to the Roth rather than $10K-taxes.

I don't understand the last part "even if you repay the taxes in time to your TIRA." That seems like it would be considered a recharacterization, no longer allowed on a conversion, or a contribution, which requires earnings.

The last part, the with holding is also a a conversions. As with any withdraw it can be put back withing 60 days and no tax would be owed. One may have a limited number of times a year to do this. So you make a withholding to make the timing irrelevant, but you pay it back so you don't pay tax on the withholdin.

 

[RunningBum]

I think we are confusing ourselves because the conditions we use changes from post to post. In your first paragraph here, you seem to have returned the 20K to first the TIRA but later the Roth. Perhaps just the fingers got confused because I know you are thinking TIRA.

Oops, yes, I meant it gets returned to the Roth. I edited that post to correct it.

Perhaps you are placing too much emphasis on having a "correct" 1099R.
I think I remember in the old days when you could recharacterize conversions.
Say convert 100K in 2016 and recharacterize 20K in 2017. Assume you had non-deductible contributions so you had to use F8606. The instructions say to only enter the net conversion 80K as a starting pt even if you did the recharacterization after 2016 in early 2017. You did not receive a corrected 2016 1099R to reflect that so you had to write a narrative that described what you had done.

To me this recharacterization is similar to the rollover and I'm guessing that it would be treated similarly so that even if the rollover back to TIRA were done the next yr, it would be treated the same as if done the same yr. I'm also guessing that the 1099R would not be amended since it does describe the withdrawal correctly. There is not a "net withdrawal".........there is the original withdrawal described correctly in the 1099R and then a rollover described in the 5498.......that's why you need the narrative description to tie things together.

The 1099R is not a definitive document to describe the tax consequences of a withdrawal. Even tho there is a box 2a that gives a taxable amount, there is also a box2b (taxable amount not determined) that should almost always (if not always) be checked.............the custodian does not know if you are going to do a 60 day rollover, if you have non-deductible contributions, are doing a QCD, etc.

You might be right. I do remember accounting for a recharacterization without a supporting 1099-R.

 

[kaneohe]

Oops, yes, I meant it gets returned to the Roth. I edited that post to correct it.

You might be right. I do remember accounting for a recharacterization without a supporting 1099-R.

Where did you return it to?
Might be a sign this thread is too long...............

 

[RunningBum]

Where did you return it too?
Might be a sign this thread is too long...............

ARRGGHH! Returned to the tIRA! Sorry! Taking a break from this thread as I'm just making things worse!

 

[SecondCor521]

I've done a few Roth conversions at Vanguard and as far as I can tell they don't support income tax withholding from Roth conversions. I currently don't need to do so, therefore the lack of this ability doesn't bother me. But if you're planning on doing the gyrations described above to generate withholding via Roth conversions, I'd recommend confirming with your custodian that they in fact can do what you want.

 

[kaneohe]

I've done a few Roth conversions at Vanguard and as far as I can tell they don't support income tax withholding from Roth conversions. I currently don't need to do so, therefore the lack of this ability doesn't bother me. But if you're planning on doing the gyrations described above to generate withholding via Roth conversions, I'd recommend confirming with your custodian that they in fact can do what you want.

How about w/h from TIRA distributions? That's the most common thing I've read about.....single-purpose to generate a w/h for paying taxes, then replace the taxes w/h to resume original position.

 

[ChrisC]

I've done a few Roth conversions at Vanguard and as far as I can tell they don't support income tax withholding from Roth conversions. I currently don't need to do so, therefore the lack of this ability doesn't bother me. But if you're planning on doing the gyrations described above to generate withholding via Roth conversions, I'd recommend confirming with your custodian that they in fact can do what you want.

I don't understand Vanguard's position as you indicated. Here's Wells Fargo's position with this document: https://www.wellsfargoadvisors.com/bw/wellstrade/forms/588191.pdf. Wells essentially allows you to specify any amount for withholding if converting from a Wells tIRA to a Wells Roth IRA. Also, we've done rollovers from Voya 401K funds, where the check was sent to us to deposit in a Wells tIRA, and Voya also asked us in its form whether we wanted any amounts withheld. We have confirmed that Voya will also withhold even if we converted/rollover to a Wells Roth IRA, and TSP has also said the same thing.

You sure you're getting the straight info from Vanguard? I've known folks who have taken a short term 401k distribution from Vanguard administered 401K accounts, used the distribution to purchase a second home, and then within 60 days borrowed funds under a convention mortgage loan and used the borrowed funds to rollover the amount of the 401k distribution to a Vanguard tIRA. Not to mix transactions, but in the latter case, Vanguard appeared very flexible and I don't understand why they wouldn be flexible for simple conversions with withholding.

 

[SecondCor521]

How about w/h from TIRA distributions? That's the most common thing I've read about.....single-purpose to generate a w/h for paying taxes, then replace the taxes w/h to resume original position.

Yes, Vanguard will do withholding on tIRA distributions. My Dad used that feature to generate some withholding late in the year about a year or two ago as I discovered he was underwithheld. They did a 99% federal withholding and it worked just fine.

You sure you're getting the straight info from Vanguard?

I didn't ask them. My statement was based on the fact that I have done Roth conversions at Vanguard online and I don't recall ever seeing the option to do withholding on such conversions. However, I just googled it and it looks like there is an option to do withholding on Roth conversions; I must have just ignored/forgotten that because in my case I don't want to do withholding:

https://cashmoneylife.com/roth-ira-conversion-vanguard/

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