Roth Conversion of In Kind Stock

[jazz4cash]

Were you converting less than $10,000? If so, this sounds like just a change in share class.

I think that is correct. This would have been funds from 401k (class k co-mingled pool) to whatever retail class I would qualify for. An exchange between tIRA and Roth would be same class. I don't think the dollar value matters.


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[jazz4cash]

If you are younger than 59 1/2, won't you pay the 10% penalty on this?

I think not but the withholding cannot be part of the amount converted.


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[Animorph]

Interesting. I called Fidelity yesterday and posed this same question. They said that in-kind conversions (even for individual stocks and ETFs) are valued at the closing price on the day of conversion, not the market price at time of transaction. He also said this was a Fidelity policy and that other brokerages might handle it differently. He recommended doing the transaction right before market closing if you are targeting a specific dollar amount.

That's my experience as well. Essentially the conversion happens after market close. Always the closing price.

 

[FIREchief]

I think that is correct. This would have been funds from 401k (class k co-mingled pool) to whatever retail class I would qualify for. An exchange between tIRA and Roth would be same class. I don't think the dollar value matters.

It can matter. As an example, if somebody has $50K in tIRA Fido S&P 500 premium class, and Roth converts $8K of it, the $8K in the Roth will drop to investor class shares until it grows to $10K.

 

[FIREchief]

I think not but the withholding cannot be part of the amount converted.

Example: 40 year old does a 100% Roth conversion of a $50K tIRA, but requests 20% withholding. In reality, only 80% of the withdrawal is a Roth conversion and the other 20% is a taxable withdrawal. Since they are under 59 1/2, the 20% is subject to the additional 10% penalty from the IRS.

 

[pb4uski]

If you are younger than 59 1/2, won't you pay the 10% penalty on this?

No, no penalty on Roth conversions since you never see the money and it is still restricted.

Not sure about withholding but it may apply on that... I never do any FWT on conversions but build it into my estimated payments for the year.

 

[jazz4cash]

Example: 40 year old does a 100% Roth conversion of a $50K tIRA, but requests 20% withholding. In reality, only 80% of the withdrawal is a Roth conversion and the other 20% is a taxable withdrawal. Since they are under 59 1/2, the 20% is subject to the additional 10% penalty from the IRS.

As I mentioned you need to use other funds for withholding (or just settle up at tax time depending on your personal circumstances).


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[jazz4cash]

It can matter. As an example, if somebody has $50K in tIRA Fido S&P 500 premium class, and Roth converts $8K of it, the $8K in the Roth will drop to investor class shares until it grows to $10K.

You may be correct but as I understand this they aggregate accounts. The difference is not significant to me so maybe I just never paid much attention.


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[FIREchief]

No, no penalty on Roth conversions since you never see the money and it is still restricted.

Not sure about withholding but it may apply on that... I never do any FWT on conversions but build it into my estimated payments for the year.

It is only the withholding that I was referring to. I thought that was clear from the context, but evidently not.

 

[FIREchief]

You may be correct but as I understand this they aggregate accounts. The difference is not significant to me so maybe I just never paid much attention.

They do not aggregate amounts between accounts.