Roth continues quick question

[kongmen]

If Dw and I convert part of a traditional ira to a Roth ira and stay in the 22% tax bracket when calculating how much we owe in taxes for the conversion is it as simple as multiplying 22% times amount being converted?



Example: .22×$25000=$5500 owed in taxes.



Also should we pay the taxes at time of conversion or next year when we do our taxes?



Thanks for any replies.

 

[RunningBum]

Probably, unless that extra income reduces ACA subsidies, pushes you into a higher IRMAA tier, or causes more SS to be taxed.

When to pay taxes, not a quick answer especially with no other info. How are you paying taxes now? You could pay even quarterly taxes to reach safe harbor (look that term up if you don't know it), or you could do withholding late in the year.

 

[qwerty3656]

I think it is that simple (i.e. your example). I think technically you owe the taxes in the quarter you do the conversion, but there are safe harbor rules that might allow you to wait til you file your taxes. If you have enough taxable money (i.e. non IRA money) your probably better off paying the taxes out of your taxable account to keep more money tax deferred. I don't have that luxury, so I usually withdraw some IRA money and have my Broker withhold a big chunk of it (enough to cover any taxes I might owe on the conversion amount, the withdrawal amount and any other income I might owe taxes on).

 

[Out-to-Lunch]

The short answer is "Yes." That is, if you are in the 22% bracket without conversions, and then you make a conversion that does NOT take you into the next bracket, then the additional tax should be 22% of the amount you convert.

The longer answer is that it can be more complicated than that! The additional taxable income could, for example, push more SS income into taxable, could force the phase-out of some credits, etc.

 

[RetiredAndLovingIt]

TurboTax has a "what If" feature where you could plug in your Roth Conversion amount in different amounts and figure out taxes based on this years tax numbers assuming that would be the only change. If you're getting an ACA subsidy you will lose some of it due to the increased income.
Dinkytown.net also has a tax calculator but it's not updated for 2022 yet.

I use both around October to get an idea of my upcoming tax burden and have till the end of the year to do an additional conversion if I have room.

 

[kongmen]

I appreciate all the responses. Sorry for the misused word in the title I don't know how to edit it.



We are not old enough to draw ss (not far though) and are not on the aca exchange. The conversion puts us just below the 24% tax bracket. We were thinking we will simply write a check for the 22% when we do the conversion. Do we send that money directly to the irs or to our online broker?

 

[SecondCor521]

I appreciate all the responses. Sorry for the misused word in the title I don't know how to edit it.



We are not old enough to draw ss (not far though) and are not on the aca exchange. The conversion puts us just below the 24% tax bracket. We were thinking we will simply write a check for the 22% when we do the conversion. Do we send that money directly to the irs or to our online broker?

You would send it to the IRS as an estimated tax payment.

There are several ways to accomplish that. Arguably the most simple is to write a check and mail it to the appropriate address at the IRS along with an estimated tax payment voucher (which you can find in the 1040-ES document at irs.gov).

There's also a couple of online ways to pay, and you can even pay with a credit card via some services, but they charge a fairly hefty convenience fee.

 

[kongmen]

Secondcor521 are you saying that the only way to avoid paying the convenience fee is to use snail mail?

 

[Exchme]

Secondcor521 are you saying that the only way to avoid paying the convenience fee is to use snail mail?

You can pay on-line at IRS.gov. They have two systems. One with less authentication of who you are where you can only make payments and the other system requires more verification of your ID and let's you also see your estimated tax payment history and check the status of your refund.

 

[SecondCor521]

Secondcor521 are you saying that the only way to avoid paying the convenience fee is to use snail mail?

No, I wasn't. See @Exchme's answer. There are four ways, the first three are free:

1. Snail mail with an ES voucher.
2. IRS.gov/payments.
3. EFTPS.
4. A tax payment service with a convenience fee.

 

[Sunset]

One other way, is if you don't have enough free cash to pay for the tax of the conversion, would be to assign some of the IRA money to taxes at the time of conversion.

You will see this right on the form for conversion, how much tax (fed & state) do you want to pay.

 

[SecondCor521]

One other way, is if you don't have enough free cash to pay for the tax of the conversion, would be to assign some of the IRA money to taxes at the time of conversion.

You will see this right on the form for conversion, how much tax (fed & state) do you want to pay.

This works OK if you're over 59.5. If you're under 59.5, any portion of the IRA conversion that ends up going to taxes would also suffer a 10% early withdrawal penalty.

Also, Vanguard does not support tax withholdings on Roth conversions. Other IRA custodians might.

 

[misanman]

Also, Vanguard does not support tax withholdings on Roth conversions. Other IRA custodians might.

We are at Fidelity and I'm not sure if they do or don't. But it doesn't matter for us as we do the conversion and the tax payment as separate transactions. Also, the tax payment is made in December and catches us up for any yearly tax payment shortfall.

 

[latexman]

This works OK if you're over 59.5. If you're under 59.5, any portion of the IRA conversion that ends up going to taxes would also suffer a 10% early withdrawal penalty.

Wife and I are 61 and 58.

Whoever is 61, I assume the wife, if she has a tIRA, they can do it efficiently.