How to pay for Roth conversions

[RunningBum]

Does anybody know for certain if Vanguard will do withholding on Roth conversions? I seem to recall that I couldn't make that happen last year.

I thought I remembered that they did, but am not sure. It's very simple to start a Roth conversion and see, but cancel out before completing it.

 

[MacsNMore]

Does anybody know for certain if Vanguard will do withholding on Roth conversions? I seem to recall that I couldn't make that happen last year.

VG did not allow withholding when I converted earlier this year.

 

[Senator]

Sorry to be thick.... If I make a sizable tIRA to Roth conversion this month, have not made estimated quarterly payments in Q1-3, my withholdings from payroll are less than the 2018 (due to a partial year of w*rk) - am I screwed by the safe harbor provision even if I make a Q4 payment ahead of the Roth conversion and generously cover the tax to be paid?

If you still have earned income, just increase the amount withheld. I used to do another $2K per paycheck.

Withholding is deemed to be taken out evenly throughout the year, whether it was or not.

 

[Perryinva]

I wonder if that is also true for withholding from pensions, even though that is not earned (but taxable) income. That would make my conversions much easier. Wouldn’t matter to me whether I withdrew from after tax/taxable accounts to live or from pension.

I’m still trying to understand the practical difference between tIRA withdrawal with conversion within 60days vs direct conversion within the same investment house. I can’t do any conversions until 2021, so there is no rush at this point.

 

[kaneohe]

I wonder if that is also true for withholding from pensions, even though that is not earned (but taxable) income. That would make my conversions much easier. Wouldn’t matter to me whether I withdrew from after tax/taxable accounts to live or from pension.

I’m still trying to understand the practical difference between tIRA withdrawal with conversion within 60days vs direct conversion within the same investment house. I can’t do any conversions until 2021, so there is no rush at this point.

Withholding from pension, IRA withdrawals, SS, etc. all count the same as
from wages........treated as w/d evenly during yr even if is from a one-time payment.

Not sure if there is any practical difference in the Roth conversion tho direct
seems simpler.

 

[ER2B]

Using tIRA money to pay the Roth conversion taxes vs taxable accounts is often said to be a no-no. Sure, you end up with lower balances it the accounts. I personallty don't think it is a loosing situation. At least in most cases. If one looks not to the dollar amount in the account, but to what that dollar amount buys you on the withdrawal end, it is mostly a wash. It could even be a benefit if in a lower tax bracket at the time of conversion. Looking at RMD time, we will definitely be in a higher tax bracket. And when either I or my wife leave this world and the survivor is filing as single, it changes the picture even more so in favor of paying taxes now at the lower or equal tax rate.

Sorry, I have not examples to show. There are too many assumptions and variables to go thru to prove my point.

We will be in a much lower tax bracket next year after wife retires. We're going to live on just my non COLA pension and her early retirement COLA'd pension. We're not claiming SS until I turn 70 and she turns 67. We're 61 and 64 right now. With the replies I gathered here, we're going to use taxable funds to pay for ROTH conversions up to the 22%. I'm going to have IRS bill me for the penalty whatever it is. So far, we've been lucky not paying any penalty despite unequal estimated tax payments. Maybe because we overpay these estimates. Uncle Sam gets to use our money.

 

[rayvt]

The penalty isn't usually that big anyway. I originally thought that the penalty was figured on how much you underpaid your tax. But it's not. It's figured on how far you were from the safe-harbor amount -- and that's usually much less than the amount you owe.

Ex: if your tax is $25,000 and your withholding+est.payments was $10,000 and your safe-harbor amount (such as your last years tax) is $12,000, the penalty is based on $2,000 not $15,000.

 

[ChrisC]

VG did not allow withholding when I converted earlier this year.

Hmmmm, I thought we covered most of the issues raised by this thread in the following thread, including people reporting that Vanguard permitted withholding from tIRA conversions to Roth IRAs.

http://www.early-retirement.org/for...quarterly-estimated-tax-payments-97537-3.html

 

[Kwirk]

I just tried a mock conversion on Vanguard.com. Here is the message:

"Withholding for federal and state taxes isn't available for Roth conversions requested on vanguard.com. You must elect not to have withholding applied to proceed. Call us at 800-345-1344 if you need information about requesting a Roth conversion for which you would like withholding."

I vaguely recall grumbling and calling last year. Calling didn't get me any further than the online attempt. I wound up doing a conversion and a separate distribution to my checking account for taxes. (This year I may try a 99% withholding on the separate conversion. So many good ideas here!)

 

[ER2B]

With stocks as it is, the cost to do Roth conversions just got cheaper.

 

[pb4uski]

With stocks as it is, the cost to do Roth conversions just got cheaper.

Huh? The value of $10k of VTSAX for 1 month is $10,038.65, for 3 months is $9,906.29 and YTD is $11,844.64.

 

[CRLLS]

With stocks as it is, the cost to do Roth conversions just got cheaper.

I don't understand. Conversion of $50K from a tIRA to a Roth would ends up with the same number of shares of the same funds/stock, IOW $50K, no? Dollars out and in, and taxes are constant regardless of the market value.

Explain please.

 

[RetireBy90]

I don't understand. Conversion of $50K from a tIRA to a Roth would ends up with the same number of shares of the same funds/stock, IOW $50K, no? Dollars out and in, and taxes are constant regardless of the market value.

Explain please.

If I understand the previous comment, if you hold 100 shares that were selling for $10 per share and you convert them to Roth IRA you had taxes on $1,000 due. If the stock (or fund) fell in price to $9 and you converted same 100 shares you would owe taxes on $900. Same if you sold shares and moved cash or if you move shares in-kind.

 

[ER2B]

If I understand the previous comment, if you hold 100 shares that were selling for $10 per share and you convert them to Roth IRA you had taxes on $1,000 due. If the stock (or fund) fell in price to $9 and you converted same 100 shares you would owe taxes on $900. Same if you sold shares and moved cash or if you move shares in-kind.

+1 you got it

 

[RunningBum]

Except, stocks really haven't fallen and gotten cheaper. Yeah, a whopping ~1.5% today so far, but still higher than a month ago. So I still don't get it.

 

[CRLLS]

If I understand the previous comment, if you hold 100 shares that were selling for $10 per share and you convert them to Roth IRA you had taxes on $1,000 due. If the stock (or fund) fell in price to $9 and you converted same 100 shares you would owe taxes on $900. Same if you sold shares and moved cash or if you move shares in-kind.

Yeah I figured that was what they were referring to. But I have not seen anyone who plans in terms of shares converted. Virtually all the time conversion is talked about, it is in $$., such as "I have this many dollars I want to convert to keep within the xxx tax bracket" or below the ACA subsidy level, or..... This Roth Conversion methodology in shares is new to me.

I'm not saying it is wrong, just new to me. I don't see the advantage. But if that is what floats your boat, why not?

 

[UpAnchor]

VG did not allow withholding when I converted earlier this year.

I just tried a mock conversion on Vanguard.com. Here is the message:

"Withholding for federal and state taxes isn't available for Roth conversions requested on vanguard.com. You must elect not to have withholding applied to proceed. Call us at 800-345-1344 if you need information about requesting a Roth conversion for which you would like withholding."

This is one of the reasons we hold retirement assets at FIDO in addition to Vanguard. While overall I prefer Vanguard (and it’s fund choices) and have roughly 2/3 of our assets there, Fidelity on the other hand allows fed/state withholding on Roth conversions as well as MN withholding on TIRA withdrawals. So...TIRA withdrawals for living expenses through the year are from our Vanguard IRAs with fed withholding. Roth conversions are done in December at Fido with state withholding. So...all taxes, fed & state, are done via withholding & we avoid having to file estimated taxes. (I do a pro-forma return in TurboTax in December to determine how much to have withheld from our last-of-year transaction at Fidelity, whether that’s a Roth conversion, a TIRA withdrawal or a combination of the two.)

 

[RunningBum]

Yeah I figured that was what they were referring to. But I have not seen anyone who plans in terms of shares converted. Virtually all the time conversion is talked about, it is in $$., such as "I have this many dollars I want to convert to keep within the xxx tax bracket" or below the ACA subsidy level, or..... This Roth Conversion methodology in shares is new to me.

I'm not saying it is wrong, just new to me. I don't see the advantage. But if that is what floats your boat, why not?

It doesn't matter whether you plan in terms of shares or dollars, if you can convert at a market low it is better than a high. If you do it by dollars, you can convert more shares at a low for the same tax cost. We're just not at a low right now.

 

[ER2B]

This is one of the reasons we hold retirement assets at FIDO in addition to Vanguard. While overall I prefer Vanguard (and it’s fund choices) and have roughly 2/3 of our assets there, Fidelity on the other hand allows fed/state withholding on Roth conversions as well as MN withholding on TIRA withdrawals. So...TIRA withdrawals for living expenses through the year are from our Vanguard IRAs with fed withholding. Roth conversions are done in December at Fido with state withholding. So...all taxes, fed & state, are done via withholding & we avoid having to file estimated taxes. (I do a pro-forma return in TurboTax in December to determine how much to have withheld from our last-of-year transaction at Fidelity, whether that’s a Roth conversion, a TIRA withdrawal or a combination of the two.)

+1 I like how you draw from VG and Fido. Thanks for sharing this. I also learned that Fido allows partial CD Roth conversions. VG doesn't. But that's beside the point because CDs aren't volatile like equities.

 

[RetireBy90]

Yeah I figured that was what they were referring to. But I have not seen anyone who plans in terms of shares converted. Virtually all the time conversion is talked about, it is in $$., such as "I have this many dollars I want to convert to keep within the xxx tax bracket" or below the ACA subsidy level, or..... This Roth Conversion methodology in shares is new to me.

I'm not saying it is wrong, just new to me. I don't see the advantage. But if that is what floats your boat, why not?

My plan isn't based on shared converted, only on most converted with minimum tax hit. I agree we are nowhere near a price point where it would make much difference.

 

[Perryinva]

I want to maintain a fairly constant income, we have plenty of fixed income for all living expenses but still require regular withdrawals from the portfolio to enjoy the discretionary funding of the things we want to do while young enough to. We only have about $300k in after tax funds, and will have to start using them for both Roth conversion taxes and to pay to delay SS. But even then, I will still be drawing from tIRA, as those are our largest accounts, which I want to reduce as much as possible before RMDs. So inevitably (since funds are fungible) some of my Roth conversion taxes will have to be paid for with IRA funds if I convert well in to the 22(25)% bracket. Once the rates return, there is really no sense to convert past 12%, I guess.

 

[RunningBum]

So inevitably (since funds are fungible) some of my Roth conversion taxes will have to be paid for with IRA funds

This isn't quite a "money is fungible" situation. The numbers work out better if you can pay taxes from taxable. By paying taxes out of the IRA, you are missing a chance to move more into a Roth, which is the best place to have money.

If it's unavoidable, that's fine, but don't fool yourself that it doesn't matter where you pay taxes from.

 

[pb4uski]

^^^ But... the benefit is not horribly significant... the benefit is the growth of the tax money not being taxed because it is in the Roth.... so for example:

$100k IRA + $15k taxable... 15% interest rate, 6% pre-tax earnings rate, 10 year tiem horizon

Conversion tax paid from IRA... $85k Roth grows to $152,222 ($85k * (1+6%)^10) and taxable account grows to $24,667 ($15k * (1+(6%*(1-15%)))^10)... total of $176,889

Conversion tax paid from taxable funds... $100k Roth grows to $179,085 ($100k * (1+6%)^10)

Difference is $2,196 over 10 years.... or difference between $15k accrued at pre-tax return of 6% in IRA or after-tax return of 5.1% in taxable... $15k * (1+6%)^10 vs $15k * (1+(6%*(1-15%)))^10.

$2,196 benefit in relation to $115k of money = 1.9%... that's for 10 years... so benefit is ~.2%/year.

 

[RunningBum]

^^^ But... the benefit is not horribly significant... the benefit is the growth of the tax money not being taxed because it is in the Roth.... so for example:

...

$2,196 benefit in relation to $115k of money = 1.9%... that's for 10 years... so benefit is ~.2%/year.

That's fine. I didn't say there was a big difference, but it's something. As I said, this is not a "money is fungible" case as Perry said.

If you could invest in an index fund with the same basic holdings and risk at .1% or .3% fees, wouldn't you take the one at .1%? The difference is small, but it's still there. You don't have to hit a home run with financial choices to make them worthwhile. A lot of singles add up to more significant gains. I prefer to make as many favorable choices as I can, big or small. Why get lazy and give something up?

If you just don't have the taxable funds available to pay the tax, you have no choice, and you can know that you aren't giving up a major opportunity. But you are giving up something.

 

[pb4uski]

^^^^ I agree with everything you said in post #47, but I just wanted to make sure that folks had a sense of the magnitude of the benefit.