All Roth Conversion or some IRA withdrawal for tax withholding

[twobits]

We have a goal to decrease the values of our tIRAs before RMDs take effect, stay in the 12% tax bracket until we take social security, and build up our Roth IRAs.

With that in mind, we are doing 50k in Roth conversions each year until we take social security. Once we reach 59 1/2, though, we also like the idea of using some of that 50k for a tIRA withdrawal for tax withholding (instead of using our after tax investment money to make quarterly tax payments.) We're just not sure about converting less to our Roth.

Other than a preference of how much we want to convert, are there other things we should be considering when deciding if the 50k should be all Roth conversion, or if a portion (probably 10k) should be a regular tIRA withdrawal for tax withholding purposes?

 

[Out-to-Lunch]

It sounds like you have adequate funds in taxable for both your spending needs and taxes on Roth conversions. Do I have that correct?

If so, there is a way you can do both of your goals. You can pay for taxes with a withdrawal from your tIRA with witholding. You can then redeposit this money back into your tIRA from taxable deeming it as an indirect rollover (which we have been recently discussing on a different thread: https://www.early-retirement.org/forums/f28/paying-taxes-in-retirement-with-tax-withholding-distributions-120051.html).

In addition, you can make a Roth conversion in your desired amount, and pay for the required taxes from your taxable. (You could/should pay for these taxes as part of the process described in the first paragraph.)

 

[Gumby]

.....

In addition, you can make a Roth conversion in your desired amount, and pay for the required taxes from your taxable. (You could/should pay for these taxes as part of the process described in the first paragraph.)

The way I would do it. One tIRA Roth conversion with no taxes withheld. A second tIRA withdrawal in the amount of all the taxes you need to pay (for any income, not just the conversion) and have it all withheld. If you are trying to quickly reduce your tIRA before RMDs, then I would not restore money to the tIRA. Nor would I just pay the taxes from my taxable accounts.

 

[RetireBy90]

The benefit of doing the all Roth and paying taxes from after tax funds is any gains in the Roth will be tax free, where any gains,in after tax will be subject to taxes. With your long time horizon, using rule of 72 and say 8% returns, $10K in Roth could be $40K in 27 years.
I have a mix of traditional IRA, Roth, and after tax for flexibility. If I spend some funds I can choose the most efficient source, tax wise that is.

 

[twobits]

It sounds like you have adequate funds in taxable for both your spending needs and taxes on Roth conversions. Do I have that correct?

Yes, we do have enough in taxable for spending and conversion taxes.
Thank you for the link for the indirect rollover thread, I'll check it out. That might be the best solution.

 

[twobits]

The way I would do it. One tIRA Roth conversion with no taxes withheld. A second tIRA withdrawal in the amount of all the taxes you need to pay (for any income, not just the conversion) and have it all withheld. If you are trying to quickly reduce your tIRA before RMDs, then I would not restore money to the tIRA. Nor would I just pay the taxes from my taxable accounts.

Because we are keeping the total amount removed from the tIRA to 50k each year, my dilemma is choosing to build the Roth as much as possible, or converting less to also allow for tax withholding on a separate withdrawal. After I read up on indirect rollovers, I'm hoping that will give me the best of both worlds.

The benefit of doing the all Roth and paying taxes from after tax funds is any gains in the Roth will be tax free, where any gains,in after tax will be subject to taxes.

A very good point that I didn't think of. Okay, I think I know how we should do this.


Thank you for all the input!

 

[CRLLS]

The way I would do it. One tIRA Roth conversion with no taxes withheld. A second tIRA withdrawal in the amount of all the taxes you need to pay (for any income, not just the conversion) and have it all withheld. If you are trying to quickly reduce your tIRA before RMDs, then I would not restore money to the tIRA. Nor would I just pay the taxes from my taxable accounts.

We have had the same concern, reducing RMDs in the future. The highlighted is how Fidelity has set my Roth conversions up in the past when I called their support line. Two separate withdrawals from the tIRA. One is 100% for the conversion and one is 100% for the taxes. We had very little headroom in our after-tax accounts to cover the taxes.

 

[SecondCor521]

Yes, we do have enough in taxable for spending and conversion taxes.
Thank you for the link for the indirect rollover thread, I'll check it out. That might be the best solution.

Keep in mind that you are limited to one indirect rollover per rolling one year period. So if you started an indirect rollover on September 17th this year and then started an indirect rollover on September 13th next year, you'd run into rather severe tax trouble IIRC.

 

[SecondCor521]

The way I would do it. One tIRA Roth conversion with no taxes withheld. A second tIRA withdrawal in the amount of all the taxes you need to pay (for any income, not just the conversion) and have it all withheld. If you are trying to quickly reduce your tIRA before RMDs, then I would not restore money to the tIRA. Nor would I just pay the taxes from my taxable accounts.

Remember that the second withdrawal for taxes also (generally) adds to income.

 

[thefist]

If so, there is a way you can do both of your goals. You can pay for taxes with a withdrawal from your tIRA with witholding. You can then redeposit this money back into your tIRA from taxable deeming it as an indirect rollover (which we have been recently discussing on a different thread: https://www.early-retirement.org/forums/f28/paying-taxes-in-retirement-with-tax-withholding-distributions-120051.html).

Will this strategy work under 59.5 or will the 10% penalty apply? I wasn’t able to find this info.

 

[pb4uski]

Interesting question but at the end of the day, after the rollover contribution that replaces any taxes withheld from the conversion, you have not made a withdrawal so I would think that the 10% penalty would not apply.

But if it were me I would just do the conversion with no withholding and then make an estimated payment for the taxes.

 

[thefist]

But if it were me I would just do the conversion with no withholding and then make an estimated payment for the taxes.

Or wait until 2025 tax year once 59.5 is passed.

 

[Al18]

A Roth IRA conversion is treated as an IRA withdrawal for tax purposes. You will pay a penalty if you withdraw IRA funds prior to 59 1/2.

 

[Out-to-Lunch]

A Roth IRA conversion is treated as an IRA withdrawal for tax purposes. You will pay a penalty if you withdraw IRA funds prior to 59 1/2.

It sounds to me like you are saying that a Roth conversion (rollover) executed before 59.5 would incur a penalty. Is that what you were saying? Because that is not true. It is considered a rollover; you must pay taxes, but no penalty.


Edit: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

 

[pb4uski]

It sounds to me like you are saying that a Roth conversion (rollover) executed before 59.5 would incur a penalty. Is that what you were saying? Because that is not true. It is considered a rollover; you must pay taxes, but no penalty.


Edit: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-on-early-distributions

+1 What Al18 wrote in post #13 is incorrect as long as there is no withholding on the conversion.

OTOH, if someone under 59-1/2 does a conversion and has taxes withheld then the amount withheld is an early distributions and subject to the 10% penalty.

I'm not totally sure but suspect if you can do a rollover contribution to replace the withholding within 60bdays and not more than once every 12nmonths then perhaps it would not be considered a withdrawal and the penalty would not apply.

 

[Koolau]

The benefit of doing the all Roth and paying taxes from after tax funds is any gains in the Roth will be tax free, where any gains,in after tax will be subject to taxes. With your long time horizon, using rule of 72 and say 8% returns, $10K in Roth could be $40K in 27 years.
I have a mix of traditional IRA, Roth, and after tax for flexibility. If I spend some funds I can choose the most efficient source, tax wise that is.

A very good point that I didn't think of. Okay, I think I know how we should do this.

An advantage that can be used even if you're paying the same tax rate now and later. In essence, you are putting "more" money into your tIRA but now calling it a Roth.

I used to try to think of my tIRAs as what they would be worth AFTER I had to pay the taxes on them when I cashed them. So a tIRA with a value of $100K would really only be worth $78K after I had to pay 22% upon cashing it. BUT converting to a Roth and paying the $22K taxes from taxable would make the Roth worth (wait for it) $100K. ALL of that $100K would then be w*rking for me and never be taxed again. Yes, my $22K would be gone from my taxable account and it would no longer w*rk for me - but I'd never owe taxes on its growth - because it would have none.

Essentially you are adding value to your Roth IRA even though you aren't otherwise entitled to do so. I consider that one of the best advantages of Roth conversion but YMMV.