Time to consider I.R.A. to Roth rollovers.

[zinger1457]

I think I'll be good to go for the first year 2023 by using the IRS 'safe harbor rules' but for the following years that won't work. I did look at form 2210, at first glance it seems the purpose of the form is to calculate penalties for late payment (Underpayment of Estimated Taxes). Why would I need to use this if I pay my estimated taxes on time?

 

[SevenUp]

Let's clarify with an example.
Assume our taxpayer's normal income is $8333 per month, or $100k per year.
Then on top of that he does a Roth conversion in January of $100k, for a total of $200k income that year.

Whether taxes on his base income are paid by withholding or by estimated quarterly payments, he will still need to make a larger than normal estimated tax payment for the first quarter to avoid modest penalties.

Examples are good.

If you mean "larger than what would be required for a $100K/yr income" then yes. Unless 2022 income was the same, and the taxpayer uses the "pay the same amount as owed last year" safe harbor, in which case a "normal" estimated tax payment would suffice.

But let's further assume 2022 income was huge so that safe harbor is closed.

The question was "If I do a lump sum conversion in January, can I pay the estimated tax payments quarterly in that year or do I have to pay it all during the first quarter when I received the lump sum?"

In 2023, a single filer under age 65 with $200K ordinary income will owe $38,400. In that case, paying the same $8,640 each "quarter" in estimated taxes would avoid underpayment penalties, even if no withholding occurs, due to the "90% of current year tax" safe harbor.

Is that what you see also?

 

[SevenUp]

I think I'll be good to go for the first year 2023 by using the IRS 'safe harbor rules' but for the following years that won't work. I did look at form 2210, at first glance it seems the purpose of the form is to calculate penalties for late payment (Underpayment of Estimated Taxes). Why would I need to use this if I pay my estimated taxes on time?

Form 2210 is what determines if estimated taxes have been paid on time.

 

[SecondCor521]

Examples are good.

If you mean "larger than what would be required for a $100K/yr income" then yes. Unless 2022 income was the same, and the taxpayer uses the "pay the same amount as owed last year" safe harbor, in which case a "normal" estimated tax payment would suffice.

But let's further assume 2022 income was huge so that safe harbor is closed.

The question was "If I do a lump sum conversion in January, can I pay the estimated tax payments quarterly in that year or do I have to pay it all during the first quarter when I received the lump sum?"

In 2023, a single filer under age 65 with $200K ordinary income will owe $38,400. In that case, paying the same $8,640 each "quarter" in estimated taxes would avoid underpayment penalties, even if no withholding occurs, due to the "90% of current year tax" safe harbor.

Is that what you see also?

I didn't check your tax math.

I think you're moving the goalposts, probably unintentionally.

Because you originally referenced Schedule AI, I was assuming that our hypothetical $200K taxpayer did not meet a safe harbor. If they did meet a safe harbor, then there is no reason to reference Schedule AI at all...the taxpayer would get short-circuited in Part I of Form 2210.

Now in the above post, you're implying that they would meet a safe harbor, which is a different situation.

Except with the conditions you describe, I think the taxpayer would *not* meet a safe harbor.

The 90% of current year tax safe harbor only applies to withholding, not estimated tax payments. See the Form 2210 line 6 description. So I think someone who made payments of 90% of their current year tax liability via estimated payments (and didn't also make 90% of their current year tax liability payments via withholding) would still be subject to underpayment penalties.

 

[zinger1457]

I went thru form 2210 with paper and pencil, it was a PITA so can't guarantee I didn't make a mistake. I used hypothetical numbers, taking a large lump sum distribution in January and making equal quarterly estimated tax payments, and it did result in a penalty, although a small one. Based on the worksheet the penalty would obviously increase the longer the estimated tax payments were delayed, like if you delayed payment until the end of the year. One way around it would be to increase my withholdings on my other income (pension, SS, etc.) to cover the extra ROTH conversion tax, might be better than sending one big check to the IRS during the first quarter.

 

[pb4uski]

Starting next year I no longer need to manage my income to maximize my ACA subsidy, will be on Medicare, so was planning to start drawing down from my qualified plans, maybe in the 5% range. Does it make sense to dump those funds into my Roth and use the Roth as a holding tank for when I want to use the funds? Don't really need the funds for my normal living expenses but plan on splurging (Die With Zero) a little, just don't have any definite plans yet. My tax bracket (22%) should be the same for the foreseeable future whether I take qualified distributions or not, close to borderline with the qualified distributions so could go up into the next bracket.

That is what I plan to do when our taxable funds are exhausted... not really exhausted but in I Bonds that I don't want to withdraw as long as the yields are good. I'll convert to the top of the 12% bracket; usually 90% or so in January and a top up for the rest in December and then withdraw from the Roth as needed for spending so unspent money remains in the Roth growing tax free.

I cover off the taxes by adjusting tax withholdings from my monthly pension to cover what I expect to pay in taxes. I then make an estimated payment so my refund is $5k in IBonds just before I electronically file my return.

 

[Chuckanut]

Given the recent inflation driven increases in the tax brackets, and the recent decline in the market, I may do an unplanned Roth conversion soon. I was pretty much creeping past the 'break-even' point for conversions. But, the above mentioned circumstances combined with the sunset on lower tax rates for individuals makes me think the odds favor pushing more Reg IRA funds into Roth IRAs. YMMV.

https://www.cbo.gov/budget-options/54787

Background
The 2017 tax act included a number of temporary changes to the individual income tax. For calendar years 2018 through 2025, taxable ordinary income earned by most individuals is subject to the following seven statutory rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. (Taxable ordinary income is all income subject to the individual income tax other than most long-term capital gains and dividends, minus allowable adjustments, exemptions, and deductions.) At the end of 2025, nearly all of the modifications to the individual income tax system made by the 2017 tax act are scheduled to expire, and the rates will revert to those under pre-2018 tax law. Beginning in 2026, the statutory rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.

 

[joesxm3]

I have been thing lately that stocks moved to Roth now will rebound quite a lot in a while, so it may make sense to go into 22% bracket and maybe even take the Medicare rate hit.

I have not seen much discussion around the effect of stock appreciation between IRA and roth.

 

[SecondCor521]

I have not seen much discussion around the effect of stock appreciation between IRA and roth.

A stock will appreciate or depreciate exactly the same inside either type of IRA.

It will grow (or shrink) tax deferred inside either type of IRA.

Since a traditional IRA comes with a deferred ordinary income tax bill, part of a stock's growth in a traditional IRA always belongs to the government.

For this reason, most advise putting higher growth investments in Roths and keeping any lower growth investments (like bonds) in traditional IRAs.

This also has a secondary effect which is limiting the growth in size of future RMDs.

I don't own foreign stock, but some also advise putting any foreign stock in taxable to take advantage of the foreign tax credit.

My Roth is all stock. My bond allocation lives in my traditional IRA.

For a while, my Dad had bonds in his Roth. I noticed this a while ago and switched it around (tax free) so that his bonds were all in his traditional instead. Same overall AA, just differently located. It has been nice seeing the higher growth in his Roth as he has avoided taxes on all that growth (well, of course, not this year, but over longer time frames).

 

[SevenUp]

You can do it quarterly. See Form 2210, particularly part III, rows 10 and 11.

Let's clarify with an example.
Assume our taxpayer's normal income is $8333 per month, or $100k per year.
Then on top of that he does a Roth conversion in January of $100k, for a total of $200k income that year.

Whether taxes on his base income are paid by withholding or by estimated quarterly payments, he will still need to make a larger than normal estimated tax payment for the first quarter to avoid modest penalties.
This assumes he chooses to do estimated payments rather than increasing his withholding for the remaining months of the year.

If you don't agree with my explanation, that's totally fine...

Examples are good.

If you mean "larger than what would be required for a $100K/yr income" then yes. Unless 2022 income was the same, and the taxpayer uses the "pay the same amount as owed last year" safe harbor, in which case a "normal" estimated tax payment would suffice.

But let's further assume 2022 income was huge so that safe harbor is closed.

The question was "If I do a lump sum conversion in January, can I pay the estimated tax payments quarterly in that year or do I have to pay it all during the first quarter when I received the lump sum?"

In 2023, a single filer under age 65 with $200K ordinary income will owe $38,400. In that case, paying the same $8,640 each "quarter" in estimated taxes would avoid underpayment penalties, even if no withholding occurs, due to the "90% of current year tax" safe harbor.

Is that what you see also?

I didn't check your tax math.

I think you're moving the goalposts, probably unintentionally.

Because you originally referenced Schedule AI, I was assuming that our hypothetical $200K taxpayer did not meet a safe harbor. If they did meet a safe harbor, then there is no reason to reference Schedule AI at all...the taxpayer would get short-circuited in Part I of Form 2210.

Now in the above post, you're implying that they would meet a safe harbor, which is a different situation.

Except with the conditions you describe, I think the taxpayer would *not* meet a safe harbor.

The 90% of current year tax safe harbor only applies to withholding, not estimated tax payments. See the Form 2210 line 6 description. So I think someone who made payments of 90% of their current year tax liability via estimated payments (and didn't also make 90% of their current year tax liability payments via withholding) would still be subject to underpayment penalties.

I made and make no reference to Schedule AI.

You are correct that Part I of form 2210 does not consider estimated payments.

Please look at lines 10 and 11 in Part III of form 2210. Each box in line 10 will have no more than 25% of 90% of the current year's tax liability.

If each box in line 11 "is equal to or more than line 10 for all payment
periods, stop here; you don’t owe a penalty."

Thus equal quarterly estimated tax payments of sufficient size will avoid a penalty. There is no need to make a larger estimated payment in Q1.

 

[RunningBum]

Please look at lines 10 and 11 in Part III of form 2210. Each box in line 10 will have no more than 25% of 90% of the current year's tax liability.

If each box in line 11 "is equal to or more than line 10 for all payment
periods, stop here; you don’t owe a penalty."

Thus equal quarterly estimated tax payments of sufficient size will avoid a penalty. There is no need to make a larger estimated payment in Q1.

Right. I do the bulk of my Roth conversion in early January. I set up 4 equal quarterly estimated tax payments using my previous year tax amount to give me safe harbor. I don't have to file out form 2210 and I don't owe a penalty. I've been doing this for a few years.

 

[SecondCor521]

I made and make no reference to Schedule AI.

You are correct that Part I of form 2210 does not consider estimated payments.

Please look at lines 10 and 11 in Part III of form 2210. Each box in line 10 will have no more than 25% of 90% of the current year's tax liability.

If each box in line 11 "is equal to or more than line 10 for all payment
periods, stop here; you don’t owe a penalty."

Thus equal quarterly estimated tax payments of sufficient size will avoid a penalty. There is no need to make a larger estimated payment in Q1.

Ah, I see. I had made an assumption that box C in Part II would be checked. That was the disconnect. (That's also why I inferred that you were referring to Schedule AI because of the first sentence on line 10, which was also a mistake.)

 

[MarieIG]

The way things are looking for me, my conversions will be back-end loaded, and my fourth quarter estimated tax payment will be larger. I did not realize that I would want to do this when I made my initial estimated payments.

I am not sure whether Vanguard will break down when you actually convert. I will need to call them to find out, as I will want to be able to prove that larger payment matches my larger conversion (income for the quarter).

 

[RunningBum]

The way things are looking for me, my conversions will be back-end loaded, and my fourth quarter estimated tax payment will be larger. I did not realize that I would want to do this when I made my initial estimated payments.

I am not sure whether Vanguard will break down when you actually convert. I will need to call them to find out, as I will want to be able to prove that larger payment matches my larger conversion (income for the quarter).

I don't think calling Vanguard will help. They'll just report the total, and the IRS assumes that total was evenly distributed unless you fill out form 2210 to tell them otherwise.

You can avoid a penalty one of two ways:

1) Safe harbor with quarterly estimated payments that are at least 25% of 90% of last year's total tax. Might be 100% for high income people. This is the method SevenUp has been describing, and if you meet that you don't have to prove when the income came.

OR

2) Fill out form 2210, where you indicated that the large conversion was done in 4Q, along with what quarter all of your other income was in. If you itemize deductions you have to show those amounts by quarter too.

Step through this yourself to verify what I've said.

 

[SecondCor521]

I don't think calling Vanguard will help. They'll just report the total, and the IRS assumes that total was evenly distributed unless you fill out form 2210 to tell them otherwise.

Correct. Vanguard will report the total of your conversions for the entire year as one number on a Form 1099-R.

You can avoid a penalty one of two ways:

1) Safe harbor with quarterly estimated payments that are at least 25% of 90% of last year's total tax. Might be 100% for high income people. This is the method SevenUp has been describing, and if you meet that you don't have to prove when the income came.

When using the "last year" safe harbor, it's 100% of last year's tax liability, or 110% for high income people.

The 90% figure is used for the "current year" safe harbor, and is the same for all income levels.

There is also other safe harbor rules, such as owing less than $1,000 and, in certain limited cases, not having any tax liability in the prior year.

 

[zinger1457]

Looks like I messed up when using form 2210 the first time, checked box C in Part II and went through the AI schedule and that schedule is very confusing and made some mistakes. Looks like you can bypass it and go straight to Part III. In that section it does become clear that as long as you make equal quarterly payments to cover your tax due you will be good to go with no penalty. Thanks for all the feedback!

 

[MarieIG]

Correct. Vanguard will report the total of your conversions for the entire year as one number on a Form 1099-R.



When using the "last year" safe harbor, it's 100% of last year's tax liability, or 110% for high income people.

The 90% figure is used for the "current year" safe harbor, and is the same for all income levels.

There is also other safe harbor rules, such as owing less than $1,000 and, in certain limited cases, not having any tax liability in the prior year.

Using theoretical numbers for high income, does this mean if last years tax liability was 100k (and all taxes were paid); it is ok if this year's tax liability is 110k?

Uggg. Just Googled it. I doubt I'm on schedule to pay 110 percent of last year's taxes, as I retired in January. Better fill out that form before those 87k IRS agents come after me. . .

 

[TheWizard]

...Uggg. Just Googled it. I doubt I'm on schedule to pay 110 percent of last year's taxes, as I retired in January. Better fill out that form before those 87k IRS agents come after me. . .

You just retired.
So look first at what your actual AGI and resultant income taxes are likely to be for 2022.
Chances are they are lower than in 2021.
If so, then the 110% safe harbor is not a good one to pick for this year...

 

[SecondCor521]

Using theoretical numbers for high income, does this mean if last years tax liability was 100k (and all taxes were paid); it is ok if this year's tax liability is 110k?

Uggg. Just Googled it. I doubt I'm on schedule to pay 110 percent of last year's taxes, as I retired in January. Better fill out that form before those 87k IRS agents come after me. . .

Then you'll probably qualify for the safe harbor of paying 90% of your 2021 tax liability.

 

[MarieIG]

You just retired.
So look first at what your actual AGI and resultant income taxes are likely to be for 2022.
Chances are they are lower than in 2021.
If so, then the 110% safe harbor is not a good one to pick for this year...

I'll be working on it.

 

[MarieIG]

Then you'll probably qualify for the safe harbor of paying 90% of your 2021 tax liability.

Hopefully . . .

 

[RetireBy90]

What is your "top" this year? 2022 AGI will be used in 2024 to determine IRMAA premiums. My original plan was to keep my 2022 AGI below 182K but that is the IRMAA threshold using 2020 AGI. Due to inflation the 2024 IRMAA thresholds could be higher but who knows for sure...

For 2022 tax year I'm keeping under $228K, but going forward I will keep under the $182K. These are 2022 numbers, so they will change but 2023 are at: https://www.cms.gov/newsroom/fact-s...s-2023-medicare-part-d-income-related-monthly
I would think the brackets will go up as long as we have this inflation thing around but I plan with firm numbers. Looks like 2023 will take the $182K to $194K. And of course as had been noted, my 2022 MAGI will impact 2024 tax year.

 

[NW-Bound]

Whether the market is up or down, the things that matter for Roth conversions are the marginal tax rate to convert now, vs. the marginal tax rate you expect if you delay the conversion to a future year.

+1

I use market timing to sell OTM options to goose return. But when it comes to Roth conversion, I convert in kind the shares that I am going to hold long-term. Market timing is not so important, although if I happen to convert at a market low, that is of course an extra benefit.

I have sat down to look over my financial situation this weekend. And I came to the realization that unless the market crashes hard and stays down, in a few years when I start RMD, the income that I have to pay taxes on will be way past the 22% tax bracket.

Given that, it is a no brainer that in the remaining years that I have left before RMD, I have got to do Roth conversion at least up to the top of the 22% tax bracket. If you have to pay 22% or higher anyway, might as well pay 22% early now, so that the Roth money has time to grow.

I wish I had more stocks in Roth now to sell OTM call options on to generate the cash I do now in IRAs. The tax-free money is just obscene.