Hare-brained Roth conversion plan (edited for simplicity)

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BarbBrooklyn
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Hare-brained Roth conversion plan (edited for simplicity)

Post by BarbBrooklyn »

I was able to do a trial run on my 2020 taxes today. I have a pension (57K) spousal SS (12K) DH's SS (24K) and a small bit of retroactive salary that will be W2 income for this year (6800). I will have taken distributions of about 13K from my tIRA by Dec 31. Running the numbers, at current withholding rates, I will have a refund of 2K due to me. I would like to take a distribution from my tIRA next month of about 8K to pay for some lumpy expenses.

Until 2023, when I take my full SS, I am at the top of the 12% bracket. It seems as though every extra dollar I take out or convert will be taxed at 22%

Since I am currently due a refund, I wondered if the following might work:

Take 8K in tIRA distribution. Have 22% withheld

Do an 8K Roth conversion from the tIRA; it seems to me that the 2K refund AND the 22% withholdking will cover any taxes due on the entire 16K.

My concern with doing a Roth conversion and paying the taxes due via estimated tax is that my understanding is that the Roth money will count as income and the taxes due should have been paid evenly thoughout the year. I am trying to avoid a penalty.

I am very much of two minds about doing Roth conversions; it does not appear that we will hit the 25% bracket even when RMDs kick in (2025); it is only if/when my DH predeceases me that I would possibly be in the 25% bracket.
Last edited by BarbBrooklyn on Fri Nov 20, 2020 2:28 pm, edited 2 times in total.
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Watty
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Re: Hare-brained Roth conversion plan

Post by Watty »

I did not follow the all details of what you were planning but you can likely get early release tax software and do dummy tax returns in December to see how that would would out then tweak the amount of your Roth conversion to get the refund to be zero. Lots of people will do dummy tax returns in December to fine tune their taxes for the year before the year end. Don't forget your state taxes too.
aristotelian
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Re: Hare-brained Roth conversion plan

Post by aristotelian »

I don't know what a "retro" is but the amount of your tax refund shouldn't be relevant to Roth vs traditional decision. The reason to do conversion is if you expect your marginal tax rate to be higher in the future, i.e. you have some reason to believe you will lose less to tax by converting now than in the future. If you are currently in the 22% bracket and expect to be in the same bracket in the future, I see no reason to do conversion now. If you could post full details of your situation we could recommend a specific conversion/withdrawal strategy for your situation.
retiringwhen
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Re: Hare-brained Roth conversion plan

Post by retiringwhen »

with no need to withhold (not doable via Vanguard)
Huh? I do annual conversions from a Vanguard Traditional IRA to Roth that are nearly fully taxable and always choose to NOT take any withholding. That is not a problem at Vanguard.

Now, are you actually taking a retirement distribution (maybe even an RMD) from the IRA, then doing a Roth Contribution? Then you may have a withholding issue.

I am thinking your post is mixing up different types of transactions and confusing the tax mechanics and consequences. I suggest if you are looking for help (and even to make sure you understand), write a step by step procedure you are following and edit the OP.
JBTX
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Re: Hare-brained Roth conversion plan

Post by JBTX »

You really need to give more specifics. It isn't clear what you are trying to do and why.
retiredjg
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Re: Hare-brained Roth conversion plan

Post by retiredjg »

Your plan is no clear to me either, but withholding $0 on a Roth conversion is certainly possible at Vanguard.
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BarbBrooklyn
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Re: Hare-brained Roth conversion plan

Post by BarbBrooklyn »

retiredjg wrote: Fri Nov 20, 2020 1:30 pm Your plan is no clear to me either, but withholding $0 on a Roth conversion is certainly possible at Vanguard.
I edited my original post for clarity, I hope. When I try to set up a Roth conversion on the Vanguard website, it tells me me that I CANNOT withhold tax from it on Vanguard.com. If anyone knows differently, please tell me!
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."
retiringwhen
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by retiringwhen »

The withholding via the IRA distribution will cover the Roth Conversion timeframe, making it not an issue as to timing of the tax payments. Even so, depending upon income compared to last year, you may still be in the safe harbor ranges.

You are on the cusp of the cost-benefit trade-off for Roth Conversions. If you already have a decent Roth balance it may not be worth it. If you have small balance (say less then 15% of total portfolio) then diversifying the tax benefit into Roth would tip me towards doing the conversion.
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Re: Hare-brained Roth conversion plan

Post by tibbitts »

BarbBrooklyn wrote: Fri Nov 20, 2020 3:42 pm
retiredjg wrote: Fri Nov 20, 2020 1:30 pm Your plan is no clear to me either, but withholding $0 on a Roth conversion is certainly possible at Vanguard.
I edited my original post for clarity, I hope. When I try to set up a Roth conversion on the Vanguard website, it tells me me that I CANNOT withhold tax from it on Vanguard.com. If anyone knows differently, please tell me!
Please don't say "the Vanguard website", since what you experience probably depends on whether you have a mutual fund or brokerage account.
retiredjg
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Re: Hare-brained Roth conversion plan

Post by retiredjg »

BarbBrooklyn wrote: Fri Nov 20, 2020 3:42 pm
retiredjg wrote: Fri Nov 20, 2020 1:30 pm Your plan is no clear to me either, but withholding $0 on a Roth conversion is certainly possible at Vanguard.
I edited my original post for clarity, I hope. When I try to set up a Roth conversion on the Vanguard website, it tells me me that I CANNOT withhold tax from it on Vanguard.com. If anyone knows differently, please tell me!
It makes no sense that you cannot withhold tax on a Roth conversion. That is a basic necessity.

I suspect you are doing something wrong...like using the sell button instead of the exchange button, or something not very obvious like that. However, I'm on the old mutual fund platform, not the new brokerage platform. I do not know what options you see if you are on the brokerage platform.

You may have to call Vanguard and get them to walk you through it.

I know this can be done on the mutual fund platform because I do it every year.
Big Dog
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Re: Hare-brained Roth conversion plan

Post by Big Dog »

retiredjg wrote: Fri Nov 20, 2020 4:44 pm
BarbBrooklyn wrote: Fri Nov 20, 2020 3:42 pm
retiredjg wrote: Fri Nov 20, 2020 1:30 pm Your plan is no clear to me either, but withholding $0 on a Roth conversion is certainly possible at Vanguard.
I edited my original post for clarity, I hope. When I try to set up a Roth conversion on the Vanguard website, it tells me me that I CANNOT withhold tax from it on Vanguard.com. If anyone knows differently, please tell me!
It makes no sense that you cannot withhold tax on a Roth conversion. That is a basic necessity.

I suspect you are doing something wrong...like using the sell button instead of the exchange button, or something not very obvious like that. However, I'm on the old mutual fund platform, not the new brokerage platform. I do not know what options you see if you are on the brokerage platform.

You may have to call Vanguard and get them to walk you through it.

I know this can be done on the mutual fund platform because I do it every year.
The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion

OP: if you do a Roth conversion, tax is only due when earned, in this case, Q4 if you do the conversion today. So you have until Jan 15 to pay the estimated due (22%?).
retiredjg
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Re: Hare-brained Roth conversion plan

Post by retiredjg »

Big Dog wrote: Fri Nov 20, 2020 5:06 pm The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion
I am shocked. That is completely nuts. And a great inconvenience. Just one more reason NOT to transition to the "new and improved" brokerage platform.

Do other brokerages do this? I may have to move to Fidelity when/if they force me off the old platform. Grumble, grumble.
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BarbBrooklyn
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Re: Hare-brained Roth conversion plan

Post by BarbBrooklyn »

retiredjg wrote: Fri Nov 20, 2020 5:19 pm
Big Dog wrote: Fri Nov 20, 2020 5:06 pm The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion
I am shocked. That is completely nuts. And a great inconvenience. Just one more reason NOT to transition to the "new and improved" brokerage platform.

Do other brokerages do this? I may have to move to Fidelity when/if they force me off the old platform. Grumble, grumble.
I converted to the brokerage platform about a month ago. And yes, this might be a reason to leave Vanguard, much as I would hate to do that.
Thanks all, for all the help!
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."
JBTX
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Re: Hare-brained Roth conversion plan

Post by JBTX »

BarbBrooklyn wrote: Fri Nov 20, 2020 5:26 pm
retiredjg wrote: Fri Nov 20, 2020 5:19 pm
Big Dog wrote: Fri Nov 20, 2020 5:06 pm The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion
I am shocked. That is completely nuts. And a great inconvenience. Just one more reason NOT to transition to the "new and improved" brokerage platform.

Do other brokerages do this? I may have to move to Fidelity when/if they force me off the old platform. Grumble, grumble.
I converted to the brokerage platform about a month ago. And yes, this might be a reason to leave Vanguard, much as I would hate to do that.
Thanks all, for all the help!
Not sure how / who does your taxes. It isn't clear whether you have to worry about estimated tax safe harbors or not at all. However, worst case scenario, if the calculations show you having an estimated tax due to timing, there are additional forms that will let you enter the actual income/payments on a quarterly basis. If you use something like turbotax this option is available.
retiringwhen
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by retiringwhen »

Also,I can think of no good things that come out of taking withholding on a Roth Conversion. That just seems like a tax reporting nightmare. Instead do the Roth Conversion, then take separate IRA distribution with 99% withholding to the level you need to cover the taxes on the conversion.

I agree, the worst the OP needs to do is write a check in January for estimated taxes if they are not in the Safe Harbor limits. Not hard at all.
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by BarbBrooklyn »

retiringwhen wrote: Fri Nov 20, 2020 6:21 pm Also,I can think of no good things that come out of taking withholding on a Roth Conversion. That just seems like a tax reporting nightmare. Instead do the Roth Conversion, then take separate IRA distribution with 99% withholding to the level you need to cover the taxes on the conversion.

I agree, the worst the OP needs to do is write a check in January for estimated taxes if they are not in the Safe Harbor limits. Not hard at all.
So the Roth conversion doesn't "look like" income that was earned all year long, the way a late in the year inheritance did a few years back? No, I am NOT in safe harbor this year, earned much less this year.

Thanks for all the good advice!
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by rkhusky »

My tIRA is a brokerage account, but my Roth is a mutual fund account. I get the same warning about not have tax withheld on Roth conversions.

You could give Vanguard a call and see if they will do it that way. Doing a separate transaction might be the cleanest way though.
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by retiringwhen »

BarbBrooklyn wrote: Fri Nov 20, 2020 6:33 pm
retiringwhen wrote: Fri Nov 20, 2020 6:21 pm Also,I can think of no good things that come out of taking withholding on a Roth Conversion. That just seems like a tax reporting nightmare. Instead do the Roth Conversion, then take separate IRA distribution with 99% withholding to the level you need to cover the taxes on the conversion.

I agree, the worst the OP needs to do is write a check in January for estimated taxes if they are not in the Safe Harbor limits. Not hard at all.
So the Roth conversion doesn't "look like" income that was earned all year long, the way a late in the year inheritance did a few years back? No, I am NOT in safe harbor this year, earned much less this year.

Thanks for all the good advice!
I think you can run a trial balloon through TurboTax just to make sure, but since you actually see the income in the 4th quarter (when you do the conversion), then the taxes need to be shown as taken in the 4th quarter, there are calculations that TT will do to help your figure it out. The best approach as withholding (preferable as it covers all "times") via a separate IRA distribution.

Or you pay an estimated tax for the quarter you incurred the income. The form 2210 will allow you allocate the income to each quarter and show you covered it when it was incurred. See IRS Form 2210, Part II, options C or D. One of them would cover down in this situation if you actually end up paying estimated taxes.

BTW, an inheritance doesn't show up as income unless the Estate earned income before it is distributed. The K-1 for the inheritance may be treated as earned all year long, not sure. I had a similar situation but it was all capital gains which i wiped out with TLH carry overs so didn't have to worry. Regardless, the 2210 form can be used to reduce or eliminate any penalty as long as timely estimated tax payments are made.
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by Big Dog »

BarbBrooklyn wrote: Fri Nov 20, 2020 6:33 pm
retiringwhen wrote: Fri Nov 20, 2020 6:21 pm Also,I can think of no good things that come out of taking withholding on a Roth Conversion. That just seems like a tax reporting nightmare. Instead do the Roth Conversion, then take separate IRA distribution with 99% withholding to the level you need to cover the taxes on the conversion.

I agree, the worst the OP needs to do is write a check in January for estimated taxes if they are not in the Safe Harbor limits. Not hard at all.
So the Roth conversion doesn't "look like" income that was earned all year long, the way a late in the year inheritance did a few years back? No, I am NOT in safe harbor this year, earned much less this year.

Thanks for all the good advice!
It can, but it doesn't have to. There is a special form (#2210) that you can use if your income is lumpy in the year.
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Re: Hare-brained Roth conversion plan

Post by Big Dog »

retiredjg wrote: Fri Nov 20, 2020 5:19 pm
Big Dog wrote: Fri Nov 20, 2020 5:06 pm The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion
I am shocked. That is completely nuts. And a great inconvenience. Just one more reason NOT to transition to the "new and improved" brokerage platform.

Do other brokerages do this? I may have to move to Fidelity when/if they force me off the old platform. Grumble, grumble.
It's fine with me since I pay any quarterly taxes due out of a cash bucket or just sell a few equities in the taxable account to generate cash.. I'd rather have as much money in the Roth as possible.
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by CAsage »

I have a Vanguard brokerage account, and I do a LOT of Roth Conversions (the children will thank me someday). I simply convert the amount I want in one (or more, like March 2020) transaction(s), and then do a simple second "withdrawal" from my IRA for 99% withholding. 75% to the IRS, and 24% to the Golden State of CA.... Vanguard allows you to specify the withdrawal up to 99% for tax withholding, so I get a tiny deposit afterwards to spend.... I do not know if they support it on Roth conversions, but I do those earlier during the year, and pay taxes in December.
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by JoinToday »

BarbBrooklyn wrote: Fri Nov 20, 2020 10:43 am ....
Until 2023, when I take my full SS, I am at the top of the 12% bracket. It seems as though every extra dollar I take out or convert will be taxed at 22%
....
If you are near the top of the 12% bracket, make sure you understand that additional ordinary income (taxed at 12%) pushes long term capital gains and qualified dividends from the the 0% tax rate to the 15% tax rate. This results in a 27% marginal tax rate for ordinary income.

If you have no LTCG or qualified dividends, or your income is actually at the top of the 12% bracket, this won't be an issue
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Re: Hare-brained Roth conversion plan (edited for simplicity)

Post by retiredjg »

BarbBrooklyn wrote: Fri Nov 20, 2020 6:33 pm No, I am NOT in safe harbor this year, earned much less this year.
There are several ways to get into a safe harbor. I believe one way is to not owe more than $1,000.
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Re: Hare-brained Roth conversion plan

Post by aristotelian »

Big Dog wrote: Fri Nov 20, 2020 8:17 pm
retiredjg wrote: Fri Nov 20, 2020 5:19 pm
Big Dog wrote: Fri Nov 20, 2020 5:06 pm The brokerage platform has a Convert button (which is akin to an in-kind transfer) and Yes, tax withholding is not available for a tIRA to Roth conversion.
Withholding for Federal or state taxes isn’t available for Roth conversions requested on Vanguard.com. You must select “I elect not to have federal and state income taxes withheld from this distribution. You are responsible for paying any taxes due, and you may incur penalties if estimated tax payments are insufficient.
https://support.vanguard.com/tutorials/roth-conversion
I am shocked. That is completely nuts. And a great inconvenience. Just one more reason NOT to transition to the "new and improved" brokerage platform.

Do other brokerages do this? I may have to move to Fidelity when/if they force me off the old platform. Grumble, grumble.
It's fine with me since I pay any quarterly taxes due out of a cash bucket or just sell a few equities in the taxable account to generate cash.. I'd rather have as much money in the Roth as possible.
Makes sense. That must be why they do it that way. They probably got a bunch of angry phone calls from people who had taxes withheld from the conversion and then blamed VG!
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