Please confirm my tax understanding

[SecondCor521]

Hi all,

Taxpayer turns 57 in 2026 and is in a taxable cash flow crunch but expecting significant external cash inflows in the next 60 days. Wants to avoid Roth distributions if possible, wants to avoid borrowing money, and expects to do Roth conversions this year for tax arbitrage reasons in an amount definitely greater than $Y in the description below. Taxpayer has no basis in his traditional IRA.

Taxpayer does the following:

1. Withdraws $X from Roth IRA on 2/13/2026.
2. Withdraws $Y from traditional IRA on 3/18/2026. No taxes withheld.
3. Deposits $X into Roth IRA before 4/14/2026 as an indirect rollover contribution.
4. Deposits $Y into Roth IRA before 5/17/2026 as an indirect Roth conversion.
5. Reports on his taxes as follows:
a. Line 4a of $X + $Y, line 4b of $Y to reflect the indirect Roth rollover as non-taxable and the Roth conversion as taxable.
b. Form 8606 Part II showing the Roth conversion of $Y since he's under 59 1/2.

I believe the above comports with the IRS once per twelve months rule as long as taxpayer stays away from any more rollovers aside from Roth conversions in the 12 months until 2/14/2027.

Correct? Incorrect? Comments? @cathy63 @pb4uski

Thanks!

 

[cathy63]

Yes, that works if you can stick to the timeline. The most likely problem is that the cash you need to redeposit fails to materialize in time.

 

[SecondCor521]

Yes, that works if you can stick to the timeline. The most likely problem is that the cash you need to redeposit fails to materialize in time.

Thank you for the confirmation. Understood on the likely problem, that had occurred to me as well - that would mean taxes plus 10% EWP.

I could do additional Roth distributions instead to avoid that which would probably be the better choice overall. I have enough Roth contribution basis and conversion basis for the amounts involved, but as noted would rather not invade the Roth if possible.

 

[SecondCor521]

Secondary question:

Suppose I make a secondary Roth distribution to myself for $Z about a month from now, where $Z is notably larger than $X.

I think I can't replace both $X and $Z into my Roth because that would violate the one rollover per year rule.

But can I redeposit $Z into my Roth IRA within 60 days of the $Z distribution and thereby choose to to make $Z my indirect rollover? Making $X just a Roth IRA distribution? (I'd report $X on Form 8606 Part III.)

 

[pb4uski]

Yes, that works if you can stick to the timeline. The most likely problem is that the cash you need to redeposit fails to materialize in time.

Just thinking out loud... can the subject extend the timeline as follows:

1. Withdraws $X from Roth IRA on 2/13/2026.
2. Withdraws $X from traditional IRA on 4/14/2026. No taxes withheld.
3. Deposits $X into Roth IRA before 4/14/2026 as an indirect rollover contribution.
4. Deposits $X into traditional IRA before 6/12/2026 as an indirect rollover conversion.

Would this work to allow the subject to stretch their cash flow funding need to ~120 days? (assumes no indirect rollovers in last year prior to 2/13/2026.

 

[SecondCor521]

^ I think it would in principle, with one minor exception - #4 would have to be into the Roth IRA, not the traditional. But I bet that's what you meant because you describe #4 as a conversion and I know you know this stuff pretty well.

There are some technicalities - $X has already been done, and $X is relatively smaller than $Y, and there are cash outflows in late March - which make the full extension to 120 days not fully realizable.

But I think if I'm careful and creative and think about it, I can make it work out OK. The additional option I've considered is some credit card float.

I should add that all of this is silly and minor optimization. I could just take money from my Roth and call it a day. That was was and is my plan A. But the cash inflows were unexpected timing and I'd rather try to get $X back into my Roth if I can, and I'd rather not pay interest, EWP, or any unappealing taxes.

I appreciate the help and comments.

 

[pb4uski]

No, for #4 I meant to the traditional IRA since it came from the traditional IRA. That would close the loop an provide $X of funding for up to 120 days.

A Roth conversion can be done separately at any time.

 

[SecondCor521]

No, for #4 I meant to the traditional IRA since it came from the traditional IRA. That would close the loop an provide $X of funding for up to 120 days.

I think that would be two indirect rollovers in a 12 month period which would violate the rule.

A Roth conversion can be done separately at any time.

Agree.

 

[pb4uski]

But one is Roth and one is traditional. Is it one for each type or one across all IRAs?

 

[RetiredHappy]

But one is Roth and one is traditional. Is it one for each type or one across all IRAs?

One across all types.