Estimated Payments/Timing

[Cobra9777]

...BTW, there's an interesting variation on this method that uses a Roth IRA... Do your normal Roth conversion and withhold whatever amount you want for taxes. Then repay that amount into the Roth within 60 days from taxable funds. This achieves the same result, but has one distinct advantage... it is not subject to the one-rollover-per-year limitation since it is a conversion.

In case anyone revisits this thread, this last paragraph apparently does not work. After I transferred the amount I wanted from my tIRA to my Roth, I wanted to pay the taxes with after tax funds. I tried, both on line and with a Fidelity representative. As rayvt mentioned in another thread, there is no way to withdraw funds from a taxable account with withholding, which is what the first Fidelity rep incorrectly told me...

It was explained multiple times in this thread that you cannot have tax withheld in conjunction with a withdrawal from a taxable account. What's more, that's not at all what I described in the last paragraph you quoted, which involves withholding from a tIRA in conjunction with a Roth conversion. What I described in that paragraph is absolutely do-able, with all the mechanics having been discussed in this thread.

...There is also no way to move money from an after tax account in to a Roth without it being considered a contribution. When we did it from a tIRA, it was easily categorized as ROLLOVER...

Also not true. In post #54, cathy63 posted a link to a Fidelity deposit slip. Using that slip, you can transfer money from a taxable account into a Roth IRA and code it as a 60-day rollover, or a Roth conversion. You can also call in and have a rep do it for you.

 

[rayvt]

So I just have to make sure I do next years one day later, and so on, since only one rollover is allowed per 12 month period. I will be done with conversions before I run out of days left in December so that will work out ok.

No you don't have to wait an extra day. I was concerned about this, too, since the IRS site says both 12 months and 1 year, without being very clear about the details. They do mention one bit about "day" which I cannot understand.

But I found a detail on a tax lawyer site:

Again, you are limited to only one rollover back into the IRA once per year.
The 365-day period for purposes of the once-per-year rollover rule starts with the date the distribution from the IRA is received. If that distribution is rolled over, no other distribution from any of that IRA owner’s IRA can be rolled over during that 365-day period. The IRS looks at all of a person’s traditional IRAs and Roth IRAs as one IRA when it comes to rollovers, for the purposes of the 1 year limit. Limit does not apply to Roth conversions.

Example: Receive distribution from IRA on September 1 of Year 1 and rolls over on October 3 of Year 1. May not take another distribution that will be eligible for rollover until September 1 of Year 2.

If you do the large 100% withheld IRA withdrawal in December then you can complete the rollover in January on the next year. However this outstanding rollover must be added to the December balance for the purpose of computing RMD.

 

[Perryinva]

It was explained multiple times in this thread that you cannot have tax withheld in conjunction with a withdrawal from a taxable account. What's more, that's not at all what I described in the last paragraph you quoted, which involves withholding from a tIRA in conjunction with a Roth conversion. What I described in that paragraph is absolutely do-able, with all the mechanics having been discussed in this thread.



Also not true. In post #54, cathy63 posted a link to a Fidelity deposit slip. Using that slip, you can transfer money from a taxable account into a Roth IRA and code it as a 60-day rollover, or a Roth conversion. You can also call in and have a rep do it for you.

Did you read what I wrote? I had already agreed with the thread, that the first rep was full of crap, and that withholding from a withdrawal is not possible. The Retirement rep agreed with that. I HAD a Fidelity rep on the phone. She very explicitly stated that what was in that thread was simply not possible. I don’t know what else to say! Like rayvt said, you can call and get a different response each time, I guess, so maybe I had another clueless one on the phone. If it IS possible, then it was too hard for the Retirement Specialist I had on the phone to figure out, and I could find no way to do it on line.

What are you saying? Your last paragraph quoted said do the conversion with the correct amount of taxes withheld. Then put that tax amount back in to the Roth from an after tax account and characterize it as a roll back/rollover. The rep said “Not possible”. The entire tIRA distribution is taxable income. That is absolutely not what I wanted, anyway. If that happened, as I mentioned, I would lose the $2800 stimulus credit if my AGI exceeded $150k. Instead, convert the correct amount to the correct AGI level, then instantly do another tIRA withdrawal with 100% withholding, for the tax payment, and then immediately after that, transfer from a taxable account back in to the tIRA and mark it as ROLLOVER. So there is no income from the second distribution because it is a rollover. The rep also said that that she could find no way to do it online, only in conjunction with a rep, which took all of 5 minutes. I wasn’t going to risk $2800 on “someone on the internet told me I could do it this way”!

Cathy63 in the same post even said she had never actually done it, but she couldn’t see why you couldn’t. I’m here telling you that the rep said “Not possible”. Iregardless of Legally right or wrong, if the Fidelity rep can’t do it and there is no clear mechanism to do it online, then it is fairly moot.

 

[Cobra9777]

Did you read what I wrote? I had already agreed with the thread, that the first rep was full of crap, and that withholding from a withdrawal is not possible. The Retirement rep agreed with that. I HAD a Fidelity rep on the phone. She very explicitly stated that what was in that thread was simply not possible. I don’t know what else to say! Like rayvt said, you can call and get a different response each time, I guess, so maybe I had another clueless one on the phone. If it IS possible, then it was too hard for the Retirement Specialist I had on the phone to figure out, and I could find no way to do it on line.

What are you saying? Your last paragraph quoted said do the conversion with the correct amount of taxes withheld. Then put that tax amount back in to the Roth from an after tax account and characterize it as a roll back/rollover. The rep said “Not possible”. The entire tIRA distribution is taxable income. That is absolutely not what I wanted, anyway. If that happened, as I mentioned, I would lose the $2800 stimulus credit if my AGI exceeded $150k. Instead, convert the correct amount to the correct AGI level, then instantly do another tIRA withdrawal with 100% withholding, for the tax payment, and then immediately after that, transfer from a taxable account back in to the tIRA and mark it as ROLLOVER. So there is no income from the second distribution because it is a rollover. The rep also said that that she could find no way to do it online, only in conjunction with a rep, which took all of 5 minutes. I wasn’t going to risk $2800 on “someone on the internet told me I could do it this way”!

Cathy63 in the same post even said she had never actually done it, but she couldn’t see why you couldn’t. I’m here telling you that the rep said “Not possible”. Iregardless of Legally right or wrong, if the Fidelity rep can’t do it and there is no clear mechanism to do it online, then it is fairly moot.

True, it cannot be done online at Fidelity. Both steps require a rep to execute the transactions. The rep I spoke to said it can absolutely be done. Either you have really bad luck with phone reps, or you and the reps are not communicating effectively.

Also, I should be clear... this method is not something I made up. I first read about it on this thread last year. Specifically, two posts by kaneohe, here and here. It's also discussed at length in the fairmark thread I linked to earlier in the thread. And subsequently I saw it referenced on several boglehead threads, such as here on this post, and here on this post. So it's abundantly clear that people are in fact using this method.

With all that background, I'd hate to see this thread end with incorrect information based on one anecdotal phone call with a Fidelity rep.

 

[rayvt]

Also not true. In post #54, cathy63 posted a link to a Fidelity deposit slip. Using that slip, you can transfer money from a taxable account into a Roth IRA and code it as a 60-day rollover, or a Roth conversion. You can also call in and have a rep do it for you.

Yes you can. But it had damn well better be a rollover from an IRA. And within 60 days of withdrawing that money from a tIRA or Roth.
Otherwise it is an invalid contribution and there are huge penalties for doing that. The various IRA publications on rollovers & contributions make this very clear.

 

[rayvt]

True, it cannot be done online at Fidelity. Both steps require a rep to execute the transactions. The rep I spoke to said it can absolutely be done. Either you have really bad luck with phone reps, or you and the reps are not communicating effectively.

Ah, consider the possibility that it is YOU and the reps who are not communicating effectively.

I'm not sure what you think is settled here.

I think you are mis-reading these other threads.

Post # 59 https://www.early-retirement.org/forums/f28/estimated-payments-timing-111924-3.html#post2704383 has the pertinent IRS information. All the information you need, I think.

A trustee transfer is not a 60-day rollover, so you can't add funds to it. Not when you do the transfer and not within 60 days. Not ever.

"Your last paragraph quoted said do the conversion with the correct amount of taxes withheld. Then put that tax amount back in to the Roth from an after tax account and characterize it as a roll back/rollover."

A trustee Roth conversion can be done. A 60-day rollover can be done.
What cannot be done is a trustee conversion of one amount and then you add money to the Roth and call it a 60-day rollover.

The *only* way to use cash that is in your hot little hands is to do a 60-day rollover. And that cash (or that amount of cash) has to have come from an IRA.

IRS publications are hard to understand fully. Sometimes you have to read a string of different pubs sequentially for several times in a row until you can understand what they really say.

As I see it, the only way that the IRS says is allowable is:
1. Do a Roth conversion of the amount you want to convert.
Either trustee-trustee or 60 day rollover, doesn't matter which. You can do as many of these as you want, with no 365-day limitation.
then,
2. Do a withdrawal from a tIRA and have a large withholding to cover the tax. You are allowed to put that same amount of money back into that or another tIRA from an outside source, but it must be done within 60 days and you cannot do it again for 365 days.
There is no provision for putting that outside money into the Roth.

I do not see anywhere any IRS documentation that says you can do a Roth conversion and add money to cover the amount you had withheld from the tIRA. If I am wrong, please point to the IRS sections that allow this. Opinions of Fidelity reps or internet posts do not count.

Actually, I think we've found a little loophole that lets us indirectly do a one-time estimated tax payment instead of quarterly payments.

 

[rayvt]

Darn it, when I started reading this thread I got all excited about this new trick. Then after closely reading various IRS pubs and thinking about the mechanics of how to do this trick, it was a downer. Because it's much ado about nothing. You can play games by moving money around, but it doesn't get you anywhere.

Dang.

Here's the deal: You are going to have to pay $XXXX income tax for this year. If you don't pay enough TIMELY quarterly payments or have enough withheld (without regard to timeliness), you have to pay a penalty.

Trick #1 is you can have money withheld from a tIRA withdrawal before Dec 31 and it is considered timely.
The downside here is that this withdrawal is itself taxable, dumping more income into this year.

Trick #2 is that you can put that sum of money back into the tIRA within 60 days, from outside funds. Thus effectively doing the withholding with non-IRA money. And also negating the tax you'd owe on the withdrawal.

Note that you *still* have to pay income tax on the money in the IRA, the only question is *when* you pay the tax, now or later.

You are retired and don't have a paycheck, so where does that money come from, to put back into the IRA?
And *when* do you put it back in? If your 60 days is up before the end of the year, you need a stash. If you don't have a stash, you'd have to take it from an IRA, and what's the point of that.

But if your 60 days extends to the next year and it is an RMD year, then you can put it back using the RMD money that you are required to withdraw no matter what.

There is no free money here. All you have done is a one-time push of the tax you owe by one year. No matter where it comes from, the withholding is just part of the $XXXX tax you pay this year.

The Roth stuff is just a distraction. A smokescreen to confuse the details of what is actually going on. All the money in the tIRA is going to be taxed, and no slight-of-hand is going to bedazzle the IRS and make any of it tax-free.

 

[cathy63]

...Here's the deal: You are going to have to pay $XXXX income tax for this year. If you don't pay enough TIMELY quarterly payments or have enough withheld (without regard to timeliness), you have to pay a penalty....

Note that you *still* have to pay income tax on the money in the IRA, the only question is *when* you pay the tax, now or later....

All the money in the tIRA is going to be taxed, and no slight-of-hand is going to bedazzle the IRS and make any of it tax-free.

Yes, of course. This entire thread is about how to wait until the last minute to pay the taxes on your tIRA withdrawal or Roth conversion and not have to pay the usual penalties associated with waiting until the last minute. Nothing here is about avoiding the taxes themselves. I'm sorry if my posts here misled you into thinking there was some secret to paying less tax. There's not.

 

[thatguy]

Is there any advantage to these tricks if you can withhold from a RMD to cover the tax on conversions?

 

[OverThinkMuch]

As you like. Using the tIRA withdrawal I don't have to have a username and pwd on a site I use once a year and I don't have to provide it with my banking information. The Schwab site is one I use frequently and am familiar with. I have never timed it but I am probably in and out of that transaction within 60 seconds.

Unless your taxes and estimated payments come to zero every year, you do have to provide the IRS your financial information - even if it's on a check. As to login and password, I don't have those on IRS Direct, either. I don't think your misconceptions match the experience I have with IRS Direct.

 

[OverThinkMuch]

Perhaps it was your itemized deductions that caused a lot of the mess. Many more people take the standard deduction now, so that simplifies things.

You still have to show when income was earned, and that can be a lot of busy work, but the institutions should have a way to filter the income items you have to include.

The payments themselves, I don't see why that would cause a headache, if you use EFTPS. It's just one payment per quarter and you can see when your payments were made on that site.

Still, it's best to avoid if you can. I wouldn't fill out form 2210 if it was only going to save me from a $10 penalty, but I would for $100.

btw it's an tax underpayment penalty, not an estimated tax penalty. Just for clarity.

Not so much itemized deductions, but selling of assets, dividends ... having to match all that up by quarter instead of lumped together for the whole year. As you point out, the forms weren't worth the savings in that case.

 

[phil1ben]

Yes, of course. This entire thread is about how to wait until the last minute to pay the taxes on your tIRA withdrawal or Roth conversion and not have to pay the usual penalties associated with waiting until the last minute. Nothing here is about avoiding the taxes themselves.

Actually, I started the thread and it had absolutely nothing to do with tIRA, Roths or avoiding taxes. It simply asked a question about the timing and application of ordinary estimated tax payments.

 

[Montecfo]

Actually, I started the thread and it had absolutely nothing to do with tIRA, Roths or avoiding taxes. It simply asked a question about the timing and application of ordinary estimated tax payments.

Yes and it seems like that was answered quickly. The subsequent discussion, which is most of the thread, has been interesting and worth the read.

 

[rayvt]

Is there any advantage to these tricks if you can withhold from a RMD to cover the tax on conversions?

The only advantage to this is that you pay your estimated tax with one (large) withholding -- usually at the end of the year -- instead of quarterly estimated payments.

You generally need to withdraw your RMDs toward the beginning of the year because you cannot do Roth conversions until you've taken all your RMD. But you probably don't want to do the one large withhold early in the year, because why give the IRS their money any sooner than you have to?

This entire thread is about how to wait until the last minute to pay the taxes on your tIRA withdrawal or Roth conversion and not have to pay the usual penalties associated with waiting until the last minute. Nothing here is about avoiding the taxes themselves. I'm sorry if my posts here misled you into thinking there was some secret to paying less tax. There's not.

Maybe I am misreading Cobra9777 and his links to fairmark, etc. threads, but it sounds like to me that this is what he is going for. The business about doing tricks with Roth withholding with 60-day rollover doesn't make any sense to me, because that is either: a) not allowed or b) doesn't do anything that a simple tIRA withholding does.

 

[rayvt]

Actually, I started the thread and it had absolutely nothing to do with tIRA, Roths or avoiding taxes. It simply asked a question about the timing and application of ordinary estimated tax payments.

It would not be the first time that a simple question veered off into a tangent discussion that was much longer than the original question. It's called "thread drift".

As Montecfo said, these tangent threads often give you valuable information.

IIRC, this business of doing one large tIRA withholding was something I learned about in a thread where the OP was something else.

 

[OldShooter]

The only advantage to this is that you pay your estimated tax with one (large) withholding -- usually at the end of the year -- instead of quarterly estimated payments. ...

The other, totally independent, piece in the discussion is the idea of paying the safe harbor amount to make estimating income and estimating taxes totally unnecessary.

Finally, the third piece is the (IMO clever) idea of "borrowing" from a tIRA to get the withholding paid and then paying it back from other funds.

Roth games? TLDR for me.

 

[Out-to-Lunch]

Yes and it seems like that was answered quickly. The subsequent discussion, which is most of the thread, has been interesting and worth the read.

+1

I, for one, am grateful. I don't know whether I would have gottten dinged for a penalty on a late-December Roth conversion of ~$50k, but it is pleasing to know that there was an easy fix for it.

 

[thatguy]

The only advantage to this is that you pay your estimated tax with one (large) withholding -- usually at the end of the year -- instead of quarterly estimated payments.

You generally need to withdraw your RMDs toward the beginning of the year because you cannot do Roth conversions until you've taken all your RMD. But you probably don't want to do the one large withhold early in the year, because why give the IRS their money any sooner than you have to?

.

As I understand it the RMDs just have to be completed before the Roth conversion. No need to do the RMD early in the year.

I have been doing the RMD in November/December and the conversion a few days later.

I don't think I see any difference in paying the tax with RMD withholding vs paying the tax from after tax money, since the RMD is becoming after tax money.

 

[Perryinva]

I don’t care a whit about paying the taxes as late as possible. 59 days delay on a few tens of thousands isn’t worth it. That is a recipe to get in to trouble. The confusion in this thread is enough to make me still recommend anyone do it via tIRA. Rollover.