Trad IRA to Roth Conversion after retirement

[TheWizard]

One option to avoid quarterly estimated payments is divide your Roth conversion into 2 parts. The larger first part is the part that 100% makes it into your Roth IRA. Then in December you can convert the smaller second part and withhold taxes on all of it. That withholding of taxes is considered timely through out the whole calendar year, thus eliminating quarterly estimated payments. The negatives are that withholding is considered income unlike if you paid your taxes from money under your mattress, and less is put into your Roth.

That whole idea of using other after-tax money to pay the taxes on a Roth conversion has been around for a while.
But it doesn't account for specific circumstances.

In my case, for instance, I had a good sized tax-deferred balance (not quite $1M) at start of retirement and very little in my taxable account.
I was over 59-1/2, so no EW penalty.

I had both pension/annuity income and withdrawal from 403(b) income in those days before SS. So which did I use to pay taxes on my Roth conversions with?

And then I had divorced spouse SS income from age 66 to 70. Maybe I used that to pay Roth conversion taxes with.

They talk about money being fungible.
I don't particularly like the word "fungible", but that doesn't really matter...

 

[Out-to-Lunch]

Then if you do a single large Roth conversion in December then do a single 4th quarter estimated payment to cover that.

You can do that, but then I believe you have to file form 2210 to show that your tax payments were timely. Right?

 

[pb4uski]

You can do that, but then I believe you have to file form 2210 to show that your tax payments were timely. Right?

Yes.

 

[Morgan22]

for anyone who has done this, what does box 7 on your 1099-R show?

I did a rollover online with Fidelity from my tIRA to Roth last December. My 1099-R shows a distribution code of 2.

 

[TheWizard]

You can do that, but then I believe you have to file form 2210 to show that your tax payments were timely. Right?

Perhaps, depending on the size of the December conversion and estimated tax payment compared to withholdings from other income.

I've done modest December conversions and estimated 4th quarter payments the past few years. FreeTaxUSA never prompted me to do a 2210 and the IRS was okay with it...

I should note that I had automatic monthly conversions set up, from 403(b) to Roth IRA. So the December conversions in those years were modest in size, to bring my AGI up close to next IRMAA threshold once I knew my other income for the year...

 

[NoEZmoney]

Pretty good video series

I've found this video series to be helpful regarding all things financial (Roth conversion, RMD's, IRMMA, Medicare, Soc Sec, etc.)

Here's a link to one but there are others on this channel.

Good luck!

https://youtu.be/GmsioIIy5Pc

 

[Sunset]

Ah! We have to figure out ahead of time what our taxes will be and submit either quarterly or pay forward all at once. Is that what you're saying? We will definitely owe more than $1000. We are tax/accounting challenged so we will have to keep paying our accountant I thought retirement is easy so we can figure it out. Not!

I just take the taxes paid for last year. mulitply by 1.1 and use that number divided into 4 payments. Regardless of whether it's correct or not, I don't get a fine as it's considered a safe harbor.

Example:
This year Fed taxes totaled: $15,000
$15,000 x 1.1 = $16,500
My 4 payments to the Feds are: ($16,500 / 4) = $4,125

I do the same with my State taxes

 

[eyenitnoy]

I have ~500,000 in a trad IRA (no taxes paid as of yet) at fidelity. My retirement income puts me in the 0% tax bracket at the moment. I'd like to begin converting some Trad IRA money into a roth. Is this a simple process at Fidelity? Will they know what I'm talking about when I call them?



My understanding is that I can simply open a Roth IRA account and begin to make these conversions. The distributions will be considered as part of my taxable income which I need to manage to keep my taxes in my comfort range. Is this the same each succeeding year? Does the pro rata rule come into effect in these circumstances?



Any advice would be helpful.

It's a simple process.
Be sure to pay taxes, if under 59.5, with money outside the retirement account to avoid penalties.
Be mindful of medicare premium income rules. Money rolled to Roth counts as income for determination of premium. If you roll over large amounts, it could increase the premium cost of Medicare.

https://www.medicare.gov/your-medicare-costs/part-b-costs

 

[oldtimer]

I did a rollover online with Fidelity from my tIRA to Roth last December. My 1099-R shows a distribution code of 2.

You must have been younger than 59.5 at time of conversion.

 

[CRLLS]

As far as how easy it is to do a Roth conversion and Fido, I have done it for several years now. I don't like making such a large transaction via a website in case I accidentally press the wrong button. I call them. It is easy and takes only 5-10 minutes. I pay the taxes from the IRA and as such, I do not have to make quarterly payments. One and done! Usually at the end of the year when I have a good handle on our finance/tax situation. In effect they make 2 separate transactions, one is for the rollover amount and one to pay the taxes.

 

[skyking1]

My plan is to set up withholding from my pension to equal the estimated tax bill for income at the top of the current 12% bracket, and convert as necessary to get there. We have a year to figure out what the interest and dividends do to our income so I can better estimate that amount.
I'm not going to sweat going over or under the bracket by a little. I'd rather write a small check or get a small refund at tax time than dink around with quarterlies.

 

[Morgan22]

You must have been younger than 59.5 at time of conversion.

Yes, that's correct.

 

[Dot57]

I've read through all of these posts and am so grateful for the breadth of knowledge here. I am 65 and didn't learn about this issue soon enough so am playing catch up. Here is my current situation:
Roth $300K
Rollover $650K
Deferred Annuity $850K
We have a rental business that brings in $150K per year. DH is 67 and taking social security at $18500.
I moved $200K from the Rollover to Roth and just paid the IRS over $75K in taxes ($25 due from rental income). Because of the rollover our taxable income increased from $160 to $360K. Doesn't that push me into the next bracket?

 

[TheWizard]

I've read through all of these posts and am so grateful for the breadth of knowledge here. I am 65 and didn't learn about this issue soon enough so am playing catch up. Here is my current situation:
Roth $300K
Rollover $650K
Deferred Annuity $850K
We have a rental business that brings in $150K per year. DH is 67 and taking social security at $18500.
I moved $200K from the Rollover to Roth and just paid the IRS over $75K in taxes ($25 due from rental income). Because of the rollover our taxable income increased from $160 to $360K. Doesn't that push me into the next bracket?

Yes.
Taxable income of $160k puts you well into the 22% Federal bracket for 2022.
24% bracket starts around $178k and 32% bracket at $340k.
Probably would have been better to keep your AGI under $340k but oh well.

Additionally, you'll both be well into the Medicare IRMAA tiers two years hence...

 

[eyenitnoy]

Yes.
Taxable income of $160k puts you well into the 22% Federal bracket for 2022.
24% bracket starts around $178k and 32% bracket at $340k.
Probably would have been better to keep your AGI under $340k but oh well.

Additionally, you'll both be well into the Medicare IRMAA tiers two years hence...

Two things often overlooked on rollovers:

-effects on Medicare premiums (2 year lookback)
-5 year rule (5 years for gains to be tax free)

Before doing any kind of rollover it is important to understand ALL of the rules and regulations.

 

[TheWizard]

Two things often overlooked on rollovers:

-effects on Medicare premiums (2 year lookback)
-5 year rule (5 years for gains to be tax free)

Before doing any kind of rollover it is important to understand ALL of the rules and regulations.

That particular five year rule depends on when each of their Roth IRAs was initially funded, I believe...

 

[ncbill]

Two things often overlooked on rollovers:

-effects on Medicare premiums (2 year lookback)
-5 year rule (5 years for gains to be tax free)

Before doing any kind of rollover it is important to understand ALL of the rules and regulations.

The above would usually contradict each other...if you're paying Medicare premiums you're well over age 59.5.

Given that, the second would only apply if you started your first Roth less than 5 years ago.

Surely those here started their first Roth back in their 30s or 40s like we did.

Heck, I maxed out my oldest kid's Roth while they were still in undergrad!

(they attended a military service academy where, by law, they were paid 35% of O-1 base salary over those 4 years)

 

[Dot57]

Thanks for all the good input. It pains me to know I could have easily stayed under the 32% bracket, which is prompting me to find a new accountant, as I had sought his advice before doing the rollover. ��
Is there an online calculator you'd recommend for helping with this process?

 

[eyenitnoy]

The above would usually contradict each other...if you're paying Medicare premiums you're well over age 59.5.

Given that, the second would only apply if you started your first Roth less than 5 years ago.

Surely those here started their first Roth back in their 30s or 40s like we did.

Heck, I maxed out my oldest kid's Roth while they were still in undergrad!

(they attended a military service academy where, by law, they were paid 35% of O-1 base salary over those 4 years)

Each rollover you make has it's own five year clock.

Medicare looks at income, with a two year lookback, for determination of premiums. Money rolled into a Roth counts as income in that year.

 

[TheWizard]

Each rollover you make has it's own five year clock...

That five year rule is only meaningful for folks under age 59.5.
Both the OP et ux are older that that age, so that clock is moot...

 

[eyenitnoy]

That five year rule is only meaningful for folks under age 59.5.
Both the OP et ux are older that that age, so that clock is moot...

There would not be a 10% penalty since they are over 59.5; Also, any contributions would not be taxable as the tax has already been paid. However, for *earnings* on the contributions to be tax free, five years needs to have elapsed from January 1 of the year they made the rollover contribution.

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

 

[TheWizard]

Thanks for all the good input. It pains me to know I could have easily stayed under the 32% bracket, which is prompting me to find a new accountant, as I had sought his advice before doing the rollover. ��
Is there an online calculator you'd recommend for helping with this process?

Calculator, no.
What I used was simply a calculator to compute my approximate AGI for the year thus far in early December, before deciding on how much additional tax-deferred money to Roth convert.

Combined with this, however, is a decently good knowledge of how my Federal income tax is computed, based on doing it myself for several decades, and reasonable predictions on IRMAA MAGI tier thresholds for two years hence...

 

[teej1985]

There would not be a 10% penalty since they are over 59.5; Also, any contributions would not be taxable as the tax has already been paid. However, for *earnings* on the contributions to be tax free, five years needs to have elapsed from January 1 of the year they made the rollover contribution.

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

Re: The earnings, it's five years since you opened your first Roth IRA, for most people that's a non-issue, for example, I opened my first Roth IRA in 2010.

 

[TheWizard]

Re: The earnings, it's five years since you opened your first Roth IRA, for most people that's a non-issue, for example, I opened my first Roth IRA in 2010.

You may not be clear on the difference between Roth CONTRIBUTIONS and Roth CONVERSIONS...

 

[Out-to-Lunch]

There would not be a 10% penalty since they are over 59.5; Also, any contributions would not be taxable as the tax has already been paid. However, for *earnings* on the contributions to be tax free, five years needs to have elapsed from January 1 of the year they made the rollover contribution.

https://www.kitces.com/blog/underst...s-for-roth-ira-contributions-and-conversions/

As teej said, if they are over 59.5, the earnings are not taxed unless they had not had ANY Roth before 5 years ago: https://www.bogleheads.org/wiki/Roth_IRA#Distributions

(I.e., not this specific conversion.)