Roth rollover questions

[Slim11]

Just kinda thinking out loud here. I have called the instatutions involved, and due to multiple answers, most not helpful I am here to ask what you alk think. So, I have a 457b with empower. I want to start rolling over money to a roth IRA, like 22k a year for 10 years. I want to pay the taxes on this with more money from the 457b. So, 7 k withdrawn to pay the taxes on the 22 k and the addtional 7k. Now, empower said they cant do this. Plus, they really dont know much when I call and ask about things. Like basic stuff. So with that said, I want to transfer 220 k to a fidelity ira. Then roll over the 22 k to the Roth. Now the fedility advisor said, I could roll over the money and then pay the taxes on it. Showed me how on the screen. When I got home the question became, I am 50, how can they pay the taxes from the IRA rollover, if I am not able to withdraw money without penalty? So, new idea is to transfer 180k to the fedility IRA, then transfer 22 k to the roth every year in January. At tax time the next year pay the taxes for the rollover from the empower account? Or do the taxes need to be paid immediately upon a rollover?

So questions are, is the fedility adviosor correct that the taxes can be taken out of a rollover from an IRA if I am 50, and if they immediately take taxes out of a rollover or can I wait to pay them when taxes are due. I can not get a clear answer from any of them. It will work, I just need to find the corect way to do it.

 

[cathy63]

1. Roll the money from the 457(b) to a tIRA, some plans will let you do a partial rollover, some won't. This is not a taxable transaction, so they probably do not have a way to withhold taxes on this transaction.
2. Do a conversion from the tIRA to the Roth (the IRS sometimes uses the term rollover for this transaction so it's not wrong, but it's easier to keep straight if you call it a conversion). Fidelity can withhold taxes on this transaction, but there will be an early withdrawal penalty unless you replace the funds from another source within 60 days.
3. If you wait and pay the taxes the next year, then you may incur a penalty for not paying your taxes in a timely fashion.

The best option is to have enough other funds available and pay quarterly estimated taxes on the quarterly due date immediately following the conversion. Though, if it's only $22K that you're converting and you don't have much other income, then you might not owe enough tax to incur a penalty anyway. There are lots of moving parts, but if you have some tax software you can do a return using your projected 2024 numbers with and without the conversion to figure out how much additional tax you will owe. If you don't have access to any software, the tax calculators at dinkytown.net can give you a good ballpark.

 

[Out-to-Lunch]

You did not make it clear if there is a way for you to make qualified distributions from your 457(b) account. It is possible at age 50 in some limitied circumstances, like if you were a cop. For the rest of my answer I will assume this is NOT the case.

My understanding is that, at your age, you will incur a penalty if you use the tax-deferred dollars to pay taxes. You would be making a non-qualified withdrawal ("distributuon") of the funds.

You may choose to make the non-qualified distribution and pay the 10% penalty on them if you want to, but most people find that price too steep.

 

[Slim11]

Yes, I can take distrabutions from the 457b without penalty. Its mine now.

And I didnt think about not being able to do a partial rollover. We were able to do it in the past, but that was like 3 companies ago. Lol. Something to check. I can pay the taxes with other accounts, but dont want to. Other income will put me at 24 percent federal, nj is moot for this as it will be non taxable for contributions. I didnt want to convert the whole account, because once I do I can not access it if needed. I probably dont need to , but why limit myself.

 

[Out-to-Lunch]

With this further information, I think your guess at the end of the first post is correct. You could rollover some of the 457 funds to an IRA. Then you could initiate a Roth conversion. Then you could make a qualified distribution from the 457, but have 99% of the amount witheld for taxes.

Your OP suggested concerns about timing of conversions ve. payments. You have a few choices: The easiest one is to meet the safe-harbor IRS rules by doing sufficient 457 withdrawals with withholding. (See, e.g., for more info.)

The other options are to file quarterly taxes, or to pay taxes as you incur them and file IRS form 2210.

 

[Slim11]

Yup, I have some homework this week coming up. I will call the plan and make sure I can do a partial rollover. Next I will see what others do with there dispusments, if taxes are due at the transaction or when you file. Last is to call my accountant, shes great, but not someone to trifle with if you didnt do your do dilagance and get her the info before hand! Lol.

 

[Slim11]

Last stupid question, for now, lol. Ok , so I am retired, but I am owed a payment this year. This is taxable income or I can set up another retirement account. They will not let me put it in my old account. Can I take this payment, as its earned income for 2024, with all the taxes excluded and open a roth on my own and deposit the max amount allowed for this year of 6500? ( not sure of the max over 50). Then later roll over a bit of my 457?

 

[SecondCor521]

Last stupid question, for now, lol. Ok , so I am retired, but I am owed a payment this year. This is taxable income or I can set up another retirement account. They will not let me put it in my old account. Can I take this payment, as its earned income for 2024, with all the taxes excluded and open a roth on my own and deposit the max amount allowed for this year of 6500? ( not sure of the max over 50). Then later roll over a bit of my 457?

If it is taxable compensation (either W-2 box 1 wages or 1099 net income from self employment), then yes, it qualifies you to make a Roth contribution. The Roth contribution has to be the lesser of your taxable compensation or $8000.

You can do your 457 rollover into the same Roth. No need to have two separate Roth accounts, although you can if you want to.

The payment will obviously also be reported as income on your 2024 return and may result in a federal tax liability. (This is in response to your "all the taxes excluded" comment - you can choose to have them not withhold anything now, but you might owe taxes on it next spring. And not paying taxes as you go risks underpayment penalties.)

Not a stupid question at all.

 

[Slim11]

Yes, taxes will be taken out. But it just accured to me that if I roll over to the roth, thats income also? So then I would be over the income limit for the roth. As of now its very boarderline. So, I may just put the max in the roth this year, and start rollovers next year. Or does a rollover not count as a dispersment? So many little things to take into consideration.

 

[SecondCor521]

Yes, taxes will be taken out. But it just accured to me that if I roll over to the roth, thats income also? So then I would be over the income limit for the roth. As of now its very boarderline. So, I may just put the max in the roth this year, and start rollovers next year. Or does a rollover not count as a dispersment? So many little things to take into consideration.

The rollover from your retirement plan is income, and will add to your tax liability.

However, the rollover is not counted when determining whether or not you are eligible to make a Roth contribution. See Worksheet 2-1 lines 2 and 3 at https://www.irs.gov/publications/p590a#en_US_2022_publink1000230985.

 

[Slim11]

The rollover from your retirement plan is income, and will add to your tax liability.

However, the rollover is not counted when determining whether or not you are eligible to make a Roth contribution. See Worksheet 2-1 lines 2 and 3 at https://www.irs.gov/publications/p590a#en_US_2022_publink1000230985.

Ty, that helps a ton. It will be roght on the cusp. So , next year I figure 110k for pension, 15 k payout for my owed time, and 15k in CD income. So , at the limit, but with the regular dedutions should fall under the 145k to be able to make the max contrabution. Then I can roll over a small amount say 22k and pay the taxes out of the bank. If I go over the income limit, I will have to figure that out. It looks like it works, but hard to determine as this Is the first year I would be retired.

 

[SecondCor521]

Ty, that helps a ton. It will be roght on the cusp. So , next year I figure 110k for pension, 15 k payout for my owed time, and 15k in CD income. So , at the limit, but with the regular dedutions should fall under the 145k to be able to make the max contrabution. Then I can roll over a small amount say 22k and pay the taxes out of the bank. If I go over the income limit, I will have to figure that out. It looks like it works, but hard to determine as this Is the first year I would be retired.

As cathy63 said earlier, there are lots of moving parts.

It sounds like you'll be OK to make the full contribution. Even if you end up going over the income limit, there are ways to deal with that later. They're a bit of a hassle but not too bad IMO.

 

[karen1972]

Some basic rules, at 50, you either need to roll the money over into some qualified vehicle OR pay a penalty, that is why withdrawing for taxes out of either the Tira or 457 is not idea, once you are 59.5 things change, but until then penalty of 10%.

Second the difference between rollover and conversion.. Rolling over is like for like so no taxable event. Converting is changing the tax vehicle and thus taxes are due upon the conversion...whether that is converting to a Roth OR converting it to cash (ie taking it out) and that holds true regardless of age.

Roth contributions can be taken out without penalty or tax at any time

Roth Conversion can be taken out after 5 years of conversion tax and penalty free at any age

Any gains in Roth regardless of source incur penalty and taxes if taken out before 59.5


So you could pay taxes with any money you already contributed to your Roth and at year 5 you could use any money you converted year 1 to pay for the taxes. It still nets you money in your Roth just the taxes are coming out tax and penalty free ideally if you can set it up appropriately thus not draining your other funding sources.

 

[Slim11]

My 457 b does not have an early penalty on it. So upon seperation of employment, retirement etc, you can use the money as you like just paying the normal tax rate on withdrawls. So , at age 50, no extra tax for taking disbursements. The idea is to convert 1/2 of my money to a roth in 10 to 15 years before I reach 65. I think its doable, if I rollover almost half to an IRA, then convert part of the ira to the roth. Then take a disbursement from the 457b to pay the taxes. For me this would work well. I would still have money in the 457b if I needed to use it in the next 10 years and I can funt a smaller Roth for later in life or to leave to the kido when I die. I dont mind taking the disbursements from the 457 to pay the taxes, I could use other money but I want to draw the account down a bit before I hit RMD. At this point, if I just rollover 190k of 440k to an IRA and then convert 22k a year to a roth and pay about 7k for that conversion through a 457 distrabution it should leave me in a good spot. Rough math , the roth will have about 270k in about 10 years with a 4 percent compounded intrest, and the 457 plan will have 480 or by thr time I need to take distrabutions. Thats after I pay the taxes. So, for me, this works. I would rather pay the taxes out of an account I am not planning to really use unless i really screw up my finaces.

 

[oldtimer]

Ty, that helps a ton. It will be roght on the cusp. So , next year I figure 110k for pension, 15 k payout for my owed time, and 15k in CD income. So , at the limit, but with the regular dedutions should fall under the 145k to be able to make the max contrabution. Then I can roll over a small amount say 22k and pay the taxes out of the bank. If I go over the income limit, I will have to figure that out. It looks like it works, but hard to determine as this Is the first year I would be retired.

110k+15k+15k=140k which is below the 146k beginning of phaseout limit for Roth contribution for a single person in 2024. Deductions have nothing to do with Roth IRA contribution MAGI (AGI + tax-free interest).