Roth or not to Roth

[engineernerd]

I plan to start doing ROTH conversions next year. One question that I have regarding making the estimate for my taxes is, how do I know in advance what my capital gains will be? I have a decent (taxable) pile in VBAIX and Vanguard seems to make their distributions very late in December. How do I account for that when I estimate how much I can convert and stay within the 22% tax bracket? I think I must be missing something obvious

This idea may not suit you, but we hold stock-index ETFs (VTI, VBR, and a few foreign ones) in our taxable accounts and those don't pay or report capital gains unless you sell shares.

We have a few individual stocks also, and only one of them (well, it WAS only one stock when we bought it) ever generates capital gains/losses on our 1099s. They are small amounts, and come from mergers and acquisitions where they sell your fractional shares.

But all of the above do generate both qualified and non-qualified dividends so there is still guesswork for taxes until the very last few days of the year.

 

[TheWizard]

This idea may not suit you, but we hold stock-index ETFs (VTI, VBR, and a few foreign ones) in our taxable accounts and those don't pay or report capital gains unless you sell shares...

Index funds of either type don't generally pay CGDs.
The equivalent MFs are VTI=VTSAX and VBR=VSIAX...

 

[NoiseBoy]

This idea may not suit you, but we hold stock-index ETFs (VTI, VBR, and a few foreign ones) in our taxable accounts and those don't pay or report capital gains unless you sell shares.

But all of the above do generate both qualified and non-qualified dividends so there is still guesswork for taxes until the very last few days of the year.

Yes, it seems that, when I was looking for a better home for my taxable savings than the Target Date fund I was in, I could have chosen more wisely. I thought an index mutual fund would have limited turnover and thus lower gains. I didn't consider an ETF at that time. I was pretty mad at Vanguard because I got whacked pretty hard by their Target Date Institutional shares fund change.

I'm not sure it's worth making the change again although my current asset allocation target is 70/30 and VBAIX is a 60/40 fund.

 

[junkanoo]

This idea may not suit you, but we hold stock-index ETFs (VTI, VBR, and a few foreign ones) in our taxable accounts and those don't pay or report capital gains unless you sell shares.

We have a few individual stocks also, and only one of them (well, it WAS only one stock when we bought it) ever generates capital gains/losses on our 1099s. They are small amounts, and come from mergers and acquisitions where they sell your fractional shares.

But all of the above do generate both qualified and non-qualified dividends so there is still guesswork for taxes until the very last few days of the year.

Hence, the problem (for some). ETF holders, happy as a clam without capital gains to worry about ... until they check out their non-qualified dividend distributions (taxed as ordinary income). Groups like Vanguard lump all dividends on their estimated year-end as "Income" leaving you hanging as to what percent of that is qualified.
I use my last year's 1099-DIV to help with this issue and get a sense of non-qualified at the aggregate level. At the aggregate, it can be as surprising as your restaurant bill once the drinks get added. I bought some of these same ETFs that invest globally in my tax-deferred account and sold them out of my taxable account.

 

[Finance Dave]

My wife and I are doing our first ROTH conversions and have converted up to the top of the 22% bracket. Neither of us are taking SS yet and we will convert over the next few years and reevaluate when we start taking SS.. We figure you are better off doing these early so it has time to grow back after the tax hit.

This is what we're doing. Just be careful about when/how you pay the taxes...fraught with rules...do your research!

 

[Exchme]

Groups like Vanguard lump all dividends on their estimated year-end as "Income" leaving you hanging as to what percent of that is qualified.
I use my last year's 1099-DIV to help with this issue and get a sense of non-qualified at the aggregate level. At the aggregate, it can be as surprising as your restaurant bill once the drinks get added.

Vanguard released the estimates of the % of qualified dividends for each fund back for 2025 as early as February.

Tax Center

advisors.vanguard.com

They released the specific numbers for 4Q on December 19 at:

https://advisors.vanguard.com/content/dam/fas/pdfs/FYEEST.pdf

 

[TheWizard]

Vanguard released the estimates of the % of qualified dividends for each fund back for 2025 as early as February.

Tax Center

advisors.vanguard.com

They released the specific numbers for 4Q on December 19 at:

https://advisors.vanguard.com/content/dam/fas/pdfs/FYEEST.pdf

They deleted that page several days ago specifically to annoy us...

 

[Exchme]

They deleted that page several days ago specifically to annoy us...

Interesting, I guess I got lucky by downloading it while it was available then.

 

[NW-Bound]

I did not read the entire thread, but how much to do Roth conversion certainly depends on the individual's situation. I am delaying SS till this year, because when I sat down and figured out our future income and RMD, we will be inside the 24% bracket unless the market crashes big time like in the Great Depression. So, I am doing Roth conversion into the 24% bracket while not claiming SS. Might as well pay the 24% tax now than later. I am getting used to big tax bills, and keep telling myself how fortunate I am when the Roth conversion did not make a dent into the recent gain of my tax-deferred accounts. What a nice problem to have! And I currently have a 7-figure Roth account to boot.

 

[NW-Bound]

Great thread - I'm going through this analysis now. I've done a few Roth conversions - all in late December. I haven't made any IRA withdrawals yet and don't expect to until RMD's

Question - Assuming some folks take withdrawals throughout the year - When do folks pay their fed tax on IRA withdrawals - either RMD's or Roth conversions?

1. When the RMD is taken or Roth conversion is made
2. Pay as part of estimated quarterly taxes
3. Wait until April 15th

I've seen a lot of folks here mention that they pay the tax when they take their RMD.

Seems to me that it would be best to take RMD and/ or Roth conversions at
the end of the year and just pay in April?

I used to pay taxes as withholding from the Roth conversion, until I learned from forum members that the IRS allowed you to make a year-end withdrawal with 100% going to taxes.

From a Web site:

IRA Withholding

When you receive a taxable distribution from an IRA you have the option to have tax withheld from it by the IRA custodian to be remitted directly to the IRS. In fact, by default the custodian will withhold 10% of the distribution. However, you can instruct the custodian to withhold either 0% or more than 10%, up to as much as 100%.

Using withholding saves the trouble of sending a payment to the IRS yourself. It also has another big advantage: Withheld tax is treated as if it is paid at an even rate over the year even if in fact it is all paid just before year-end.

This means that withholding on an IRA distribution taken just before year-end can be used to retroactively escape underpayment penalties on earlier missed quarterly estimated payments.

The advantage of this is that you can use it to pay for year-end MF distributions from your taxable accounts too. Just be sure you meet the safe-harbor rule to avoid underpayment tax penalty.

 

[Jeffman52]

This is what we're doing. Just be careful about when/how you pay the taxes...fraught with rules...do your research!

Yep. Had to do some before EOY tax payments to both the State and the Fed to ensure that I did not get penalized for being "behind on my taxes". Stupid govt, you would think they wouldn't care as long as they got paid by April 15.

 

[Jeffman52]

The investment grows at the same rate whether it is in the tIRA or the Roth, and your conversion is a bet that you will pay a lower effective tax rate (including IRMAA, NIIT, foregone ACA subsidies, everything else) now on the conversion than you will pay later on tIRA distributions.

If you do want to let your investment grow untaxed for about 11 months, you could convert in January without paying the taxes, then have the taxes withheld (from a different income source such as a 60-day tIRA rollover) in December. This does NOT work if you pay quarterly estimated taxes, btw. ADD: also remember that your investment could shrink in those 11 months, too.

Agreed. We ended up doing the ROTH in December and paying estimated taxes in the year to avoid some penalties. (I was going to have to pay the taxes anyway). But looking ahead, since I have now paid taxes on that money, and the gains in the ROTH are now not taxable, the gains will eventually offset the tax hit I already took, assuming enough time and good gains. Plus I am going to assume that taxes have a more likelihood of being higher in the future, so may as well take the hit while the taxes are lower, and also to avoid a change in RMD's in future admins that might make those taxes harsher.