Vanguard Rollover with Fed Tax Withholding

[RASAP]

This morning I tried to do an online Roth [-]rollover[/-] conversion from my 401k Rollover IRA to my existing Roth account at Vanguard. When electing to have taxes withheld, a different than usual series of online forms must be completed. I got to the point where I entered the percentage of the sale is to be withheld for taxes and was informed that the withholding amount must come from my settlement account which has a zero balance and I must sell some funds into the settlement account to cover the taxes to be withheld!? All I want to do is (for example) sell $10,000 from my 401k rollover account, have $1,000 (10%) withheld for federal taxes and have the remaining $9,000 transferred into the Roth account. What am I missing?

 

[VanWinkle]

This morning I tried to do an online Roth rollover from my 401k Rollover IRA to my existing Roth account at Vanguard. When electing to have taxes withheld, a different than usual series of online forms must be completed. I got to the point where I entered the percentage of the sale is to be withheld for taxes and was informed that the withholding amount must come from my settlement account which has a zero balance and I must sell some funds into the settlement account to cover the taxes to be withheld!? All I want to do is (for example) sell $10,000 from my 401k rollover account, have $1,000 (10%) withheld for federal taxes and have the remaining $9,000 transferred into the Roth account. What am I missing?

It is always preferred to pay the taxes from a taxable account instead of with the pre tax account. That is 1000.00 less getting into your Roth if you use your IRA money to pay the tax.

 

[PaunchyPirate]

First, to clear up some terminology, what you are doing is called a Roth Conversion. Not a rollover.

Second, Are you able to pay the estimated taxes with money that currently sits outside the Rollover IRA? It is better to do that than to use funds that are part of the conversion since. you are diminishing the investment growth capability of the money put into the Roth.

If you really want to do what you are asking, I would suggest you first sell $10,000 of your fund and let the money go to your Rollover IRA's settlement fund. Then initiate the Roth Conversion. I'm not sure if you can do this all in the same day or if you will have to wait one day after selling the $10,000 and getting the money into the settlement fund. I haven't done it this way, but the conversion process may actually make you specify a $9000 conversion with $1000 pulled out for taxes.

 

[Rianne]

Our accountant said to e-mail him when we're ready to do a Roth conversion and tell him how much. He'll send a tax coupon and we mail it to the IRS with payment from a taxable account. No need for special forms or withholding from VG.

 

[VanWinkle]

Our accountant said to e-mail him when we're ready to do a Roth conversion and tell him how much. He'll send a tax coupon and we mail it to the IRS with payment from a taxable account. No need for special forms or withholding from VG.

That is actually the way I do it as well, but I use a program to estimate the additional taxes and pay the estimated tax in the next quarters tax payment.

 

[sengsational]

You could do two transactions. Transaction 1 is the $9,000 Roth conversion. Transaction 2 is a $1,000 withdrawal where you specify 100% withholding.

 

[RASAP]

Thanks for the replies. Yes, conversion, not rollover. I have already taken into account all of the recommendations relative to paying the taxes with other funds. In reality, I only want to have about $500 of federal tax withheld. I thought this would be a lot easier to do that what it looks like it is going to be.

 

[Gumby]

Every time I have done a Roth conversion, I have first sold the mutual funds in my tIRA, which puts the proceeds in my tIRA settlement account. Then I do the conversion from my settlement account and, once the conversion is effective, reinvest in the same mutual fund in my Roth. It may take a day or three to do everything, but that would avoid the problem you're having. And, yes, I am aware the market could go up while I am holding cash, but it also could go down.

 

[MarieIG]

Ok, I've just been doing these. Let's says say you want to "convert" 10k to a Roth and withhold 10 percent. Vanguard will "yell" at you.

Do your Roth conversion as a separate transaction. Convert 9k to a Roth. You can convert "in kind" or from the settlement account. I have done it both ways. When I convert securities, I get the final amount of my conversion the following morning.

If you want to withhold, do that as a distribution - and have 99% withheld.

 

[RASAP]

Ok, I've just been doing these. Let's says say you want to "convert" 10k to a Roth and withhold 10 percent. Vanguard will "yell" at you.

Do your Roth conversion as a separate transaction. Convert 9k to a Roth. You can convert "in kind" or from the settlement account. I have done it both ways. When I convert securities, I get the final amount of my conversion the following morning.

If you want to withhold, do that as a distribution - and have 99% withheld.

After reading this and some of the other replies, the "Ah-ha" moment (more like a "duh" moment) happened. Thanks to all and Happy Holidays!

 

[Out-to-Lunch]

Yes, conversion, not rollover.

To be fair to you, the IRS does refer to this operation as a rollover; it also refers to it as a conversion, which it deems to be a subcategory of a rollover.

See, for example, https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

 

[Gumby]

You could do two transactions. Transaction 1 is the $9,000 Roth conversion. Transaction 2 is a $1,000 withdrawal where you specify 100% withholding.

That's exactly how I do it. Although Vanguard won't let you withhold 100%, only 99%, which I split proportionately between state and federal.

Another reason for splitting the transaction this way is that if you do a conversion and specify no withholding, you will get no federal OR STATE withholding. However, if you withhold ANY federal tax, Vanguard must also withhold any state tax at the minimum rate specified by state law. In Connecticut, that is 6.99% of the transaction. My marginal state tax rate is only 5.5%, and it will even up come tax time, but it is a good reason to split the conversion transaction to maximize the amount actually converted.