401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

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saver1
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401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

I am in the process of doing a traditional 401k to a Roth IRA rollover. In my circumstance, when the 401k plan sponsor issues the check to my Vanguard Roth IRA it will take out taxes due to the traditional to Roth conversion. Does this mean that I will have to deposit/contribute the tax difference into my Roth IRA after the conversion is complete in order for it to match the pre-tax amount that was originally being rolled over?

Thank you!
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retired@50
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retired@50 »

Do you have the option to tell them not to withhold taxes?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
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retired@50
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retired@50 »

saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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cheese_breath
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by cheese_breath »

Are you over 59 1/2? If not I believe you'll be charged an extra 10% penalty on the money withdrawn to pay the conversion tax.

You can contribute to the Roth to bring the balance back up to the original amount if you have enough earned income. But you don't have to.
The surest way to know the future is when it becomes the past.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retired@50 wrote: Wed May 05, 2021 1:54 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
I would like to avoid creating a new account just for this rollover. The amount being rolled over is small. I just need to know if I need to add a rollover contribution for the taxed portion to avoid a 10% penalty.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

cheese_breath wrote: Wed May 05, 2021 1:58 pm Are you over 59 1/2? If not I believe you'll be charged an extra 10% penalty on the money withdrawn to pay the conversion tax.

You can contribute to the Roth to bring the balance back up to the original amount if you have enough earned income. But you don't have to.
No, I am not over 59.5. I am trying to avoid the 10% penalty, which is why I am asking if I need to add a rollover contribution for the taxed portion.
02nz
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by 02nz »

saver1 wrote: Wed May 05, 2021 2:36 pm
retired@50 wrote: Wed May 05, 2021 1:54 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
I would like to avoid creating a new account just for this rollover. The amount being rolled over is small. I just need to know if I need to add a rollover contribution for the taxed portion to avoid a 10% penalty.
Creating a new rollover IRA account would be a matter of minutes (esp. since this would be with an institution where you already have an account) and would save you the headache of this whole issue. It's probably less work than you already invested into writing in this thread.
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cheese_breath
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by cheese_breath »

saver1 wrote: Wed May 05, 2021 2:36 pm
retired@50 wrote: Wed May 05, 2021 1:54 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
I would like to avoid creating a new account just for this rollover. The amount being rolled over is small. I just need to know if I need to add a rollover contribution for the taxed portion to avoid a 10% penalty.
I don't think that will do it. The conversion with tax and 10% penalty is one thing. The deposit is another. AFAIK the only way they're related is in your mind.
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oslocal
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by oslocal »

My Vanguard IRA account has been sitting idle for almost three years now, and it finally got some use this week. But it will soon be idle/dormant again.
Topic Author
saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

02nz wrote: Wed May 05, 2021 2:40 pm
saver1 wrote: Wed May 05, 2021 2:36 pm
retired@50 wrote: Wed May 05, 2021 1:54 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
I would like to avoid creating a new account just for this rollover. The amount being rolled over is small. I just need to know if I need to add a rollover contribution for the taxed portion to avoid a 10% penalty.
Creating a new rollover IRA account would be a matter of minutes (esp. since this would be with an institution where you already have an account) and would save you the headache of this whole issue. It's probably less work than you already invested into writing in this thread.
I am just not interested in creating a new account at the moment. I want to rollover into her existing account only.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

cheese_breath wrote: Wed May 05, 2021 2:42 pm
saver1 wrote: Wed May 05, 2021 2:36 pm
retired@50 wrote: Wed May 05, 2021 1:54 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Maybe if you roll the 401k into a traditional IRA first, then convert that new traditional IRA to Roth IRA you'd have that option. I have a IRA and Roth IRA at Vanguard and when I convert money from traditional to Roth, it allows me the option to skip withholding.

Regards,
I would like to avoid creating a new account just for this rollover. The amount being rolled over is small. I just need to know if I need to add a rollover contribution for the taxed portion to avoid a 10% penalty.
I don't think that will do it. The conversion with tax and 10% penalty is one thing. The deposit is another. AFAIK the only way they're related is in your mind.
I'll just do the rollover without adding any new contribution to it and see what happens. Thanks!
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Is this some kind of special case? Withholding taxes is not customary in this type of rollover/conversion.

What is the age of the person who owns the 401k?
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

saver1 wrote: Wed May 05, 2021 2:37 pm
cheese_breath wrote: Wed May 05, 2021 1:58 pm Are you over 59 1/2? If not I believe you'll be charged an extra 10% penalty on the money withdrawn to pay the conversion tax.

You can contribute to the Roth to bring the balance back up to the original amount if you have enough earned income. But you don't have to.
No, I am not over 59.5. I am trying to avoid the 10% penalty, which is why I am asking if I need to add a rollover contribution for the taxed portion.
If you are not over 59.5, you do need to make up the difference to avoid the penalty.

Your best choice is to avoid this entirely.
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

saver1 wrote: Wed May 05, 2021 3:35 pm I'll just do the rollover without adding any new contribution to it and see what happens. Thanks!
There will be both tax and a 10% penalty on the amount withheld for taxes. This should not be happening.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retiredjg wrote: Wed May 05, 2021 3:47 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Is this some kind of special case? Withholding taxes is not customary in this type of rollover/conversion.

What is the age of the person who owns the 401k?
I should have been clearer about it actually being a 401k. I thought it would have been more simple just saying it was 401k, but I guess not. The account is a CalStrs Retirement account, not a 401k. When you do a rollover they are required by law to take out taxes.

The person is in their 40's.
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retired@50
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retired@50 »

saver1 wrote: Wed May 05, 2021 5:59 pm
retiredjg wrote: Wed May 05, 2021 3:47 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Is this some kind of special case? Withholding taxes is not customary in this type of rollover/conversion.

What is the age of the person who owns the 401k?
I should have been clearer about it actually being a 401k. I thought it would have been more simple just saying it was 401k, but I guess not. The account is a CalStrs Retirement account, not a 401k. When you do a rollover they are required by law to take out taxes.

The person is in their 40's.
This still doesn't make sense to me. If the CalStrs money is in a tax-deferred status, then rolling it into a traditional / Rollover IRA that is also in tax-deferred status shouldn't require any withholding. Something's fishy.

Does the person still work in the job related to this account?

Is this some sort of in-service distribution?

If they are allowed to roll it into a tax-deferred Rollover IRA then they can do a Roth conversion on the money, and Fidelity or Vanguard won't get in the way by demanding withholding.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by Wiggums »

On the CalStrs form, there are two check boxes to NOT withhold federal and state taxes.

You can do the Roth conversion on that same form. You must create the Roth account so you can put the number on the CalStrs form.
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by Alan S. »

Per Sec 3405(c)(2), there is no withholding even though a rollover to a Roth IRA will be taxable. As long as the transfer is made by direct rollover you will not have to deal with withholding, but since this rollover will add taxable income you need to figure out some other way to pay the taxes.

Of course, if you receive an actual distribution then there will be mandatory 20% withholding, which is one reason to avoid doing a 60 day rollover.
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by 02nz »

retired@50 wrote: Wed May 05, 2021 6:06 pm
saver1 wrote: Wed May 05, 2021 5:59 pm
retiredjg wrote: Wed May 05, 2021 3:47 pm
saver1 wrote: Wed May 05, 2021 1:46 pm
retired@50 wrote: Wed May 05, 2021 1:43 pm Do you have the option to tell them not to withhold taxes?

Regards,
No, I don't have that option in this particular case.
Is this some kind of special case? Withholding taxes is not customary in this type of rollover/conversion.

What is the age of the person who owns the 401k?
I should have been clearer about it actually being a 401k. I thought it would have been more simple just saying it was 401k, but I guess not. The account is a CalStrs Retirement account, not a 401k. When you do a rollover they are required by law to take out taxes.

The person is in their 40's.
This still doesn't make sense to me. If the CalStrs money is in a tax-deferred status, then rolling it into a traditional / Rollover IRA that is also in tax-deferred status shouldn't require any withholding. Something's fishy.

Does the person still work in the job related to this account?

Is this some sort of in-service distribution?

If they are allowed to roll it into a tax-deferred Rollover IRA then they can do a Roth conversion on the money, and Fidelity or Vanguard won't get in the way by demanding withholding.

Regards,
Nothing fishy about it, rolling over to a traditional/rollover IRA and then doing the conversion from there would almost certainly get around the issue, but OP for some reason refuses to take the one easy and obvious solution. :oops:
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

saver1 wrote: Wed May 05, 2021 5:59 pm I should have been clearer about it actually being a 401k. I thought it would have been more simple just saying it was 401k, but I guess not. The account is a CalStrs Retirement account, not a 401k. When you do a rollover they are required by law to take out taxes.

The person is in their 40's.
A distribution to the person would require withholding taxes. A distribution would be if they send the former employee a check made out to the person. Yes, taxes would be withheld from that. And yes, the person could turn around and put it in an IRA within 60 days. In a case like this, that would be a 60 day rollover and yes, the amount of the taxes should be made up to avoid a penalty.

A direct rollover is different. There should be no withholding for a direct rollover. The check would be sent to the former employee but the check would be made out to the custodian of the IRA for the benefit of the former employee. The check itself would then be forwarded to the IRA account custodian and put in the person's IRA.

I suppose there could be an exception. If the amount is small and the former employee did not take steps in a timely manner to have the amount rolled over properly, the retirement plan might have the option to just make a distribution and send the former employee the money. I know this is possible with a 401k plan. It would not surprise me if other retirement plans can do the same.

If this is what has happened, yes...try to make up the amount withheld for taxes to avoid the penalty. And get the money into IRA before 60 days.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retiredjg wrote: Wed May 05, 2021 7:52 pm
saver1 wrote: Wed May 05, 2021 5:59 pm I should have been clearer about it actually being a 401k. I thought it would have been more simple just saying it was 401k, but I guess not. The account is a CalStrs Retirement account, not a 401k. When you do a rollover they are required by law to take out taxes.

The person is in their 40's.
A distribution to the person would require withholding taxes. A distribution would be if they send the former employee a check made out to the person. Yes, taxes would be withheld from that. And yes, the person could turn around and put it in an IRA within 60 days. In a case like this, that would be a 60 day rollover and yes, the amount of the taxes should be made up to avoid a penalty.

A direct rollover is different. There should be no withholding for a direct rollover. The check would be sent to the former employee but the check would be made out to the custodian of the IRA for the benefit of the former employee. The check itself would then be forwarded to the IRA account custodian and put in the person's IRA.

I suppose there could be an exception. If the amount is small and the former employee did not take steps in a timely manner to have the amount rolled over properly, the retirement plan might have the option to just make a distribution and send the former employee the money. I know this is possible with a 401k plan. It would not surprise me if other retirement plans can do the same.

If this is what has happened, yes...try to make up the amount withheld for taxes to avoid the penalty. And get the money into IRA before 60 days.
Sorry, for the confusion. Let me try to explain it further using a simple example. It is a rollover from Calstrs pre-tax into a Vanguard Roth IRA. The check will be issued and sent to Vanguard directly from CalStrs.

When CalStrs issues the check they will take out taxes due to it being converted into a Roth IRA. Actually, I am not entirely sure if this is true, but I assume it is.

Example:
Lets say the amount is $1,000.
- CalStrs issues a check to Vanguard with taxes taken out. Let's say 20%.
- Vanguard receives and deposits check for $800.

My question is if I need to add the $200 into the Roth IRA or do I just leave it as is with the $800 deposit?

There should not be any penalties for early withdrawal because a pre-tax to Roth IRA conversion is allowed.
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by little_star »

saver1 wrote: Wed May 05, 2021 11:43 pm
Sorry, for the confusion. Let me try to explain it further using a simple example. It is a rollover from Calstrs pre-tax into a Vanguard Roth IRA. The check will be issued and sent to Vanguard directly from CalStrs.

When CalStrs issues the check they will take out taxes due to it being converted into a Roth IRA. Actually, I am not entirely sure if this is true, but I assume it is.

Example:
Lets say the amount is $1,000.
- CalStrs issues a check to Vanguard with taxes taken out. Let's say 20%.
- Vanguard receives and deposits check for $800.

My question is if I need to add the $200 into the Roth IRA or do I just leave it as is with the $800 deposit?

There should not be any penalties for early withdrawal because a pre-tax to Roth IRA conversion is allowed.
If you are withholding funds to pay taxes on the conversion, that is equivalent to a distribution (which, in this case, goes directly to the IRS) and will be subject to the 10% early withdrawal penalty if you are under 59.5 years of age.
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

saver1 wrote: Wed May 05, 2021 11:43 pm Sorry, for the confusion. Let me try to explain it further using a simple example. It is a rollover from Calstrs pre-tax into a Vanguard Roth IRA. The check will be issued and sent to Vanguard directly from CalStrs.

When CalStrs issues the check they will take out taxes due to it being converted into a Roth IRA. Actually, I am not entirely sure if this is true, but I assume it is.
No. This is not required. It is voluntary. Taxes do have to be paid eventually on the conversion, but the taxes do not have to be paid by withholding from the distribution.


My question is if I need to add the $200 into the Roth IRA or do I just leave it as is with the $800 deposit?

There should not be any penalties for early withdrawal because a pre-tax to Roth IRA conversion is allowed.
If the entire $1,000 does not get into the Roth IRA one way or the other, then whatever did not get into Roth IRA is considered an early withdrawal since the person is not yet 59.5. In this example, the $200 would be an early withdrawal and it will be subject to a 10% penalty. So yes, you need to add the $200 if you want to avoid the penalty.


The best thing to do in most cases is to send the entire amount to Roth and pay the taxes some other way. "Some other way" could mean withholding more from salary or pension or SS or paying an estimated tax to the IRS.

It would also be acceptable to have them withhold taxes and then "make up" the part that didn't get into the Roth IRA but it needs to be in the Roth IRA within 60 days and the custodian needs to know that $200 is a rollover, not an ordinary contribution.
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retiredjg wrote: Thu May 06, 2021 7:02 am
saver1 wrote: Wed May 05, 2021 11:43 pm Sorry, for the confusion. Let me try to explain it further using a simple example. It is a rollover from Calstrs pre-tax into a Vanguard Roth IRA. The check will be issued and sent to Vanguard directly from CalStrs.

When CalStrs issues the check they will take out taxes due to it being converted into a Roth IRA. Actually, I am not entirely sure if this is true, but I assume it is.
No. This is not required. It is voluntary. Taxes do have to be paid eventually on the conversion, but the taxes do not have to be paid by withholding from the distribution.


My question is if I need to add the $200 into the Roth IRA or do I just leave it as is with the $800 deposit?

There should not be any penalties for early withdrawal because a pre-tax to Roth IRA conversion is allowed.
If the entire $1,000 does not get into the Roth IRA one way or the other, then whatever did not get into Roth IRA is considered an early withdrawal since the person is not yet 59.5. In this example, the $200 would be an early withdrawal and it will be subject to a 10% penalty. So yes, you need to add the $200 if you want to avoid the penalty.


The best thing to do in most cases is to send the entire amount to Roth and pay the taxes some other way. "Some other way" could mean withholding more from salary or pension or SS or paying an estimated tax to the IRS.

It would also be acceptable to have them withhold taxes and then "make up" the part that didn't get into the Roth IRA but it needs to be in the Roth IRA within 60 days and the custodian needs to know that $200 is a rollover, not an ordinary contribution.
I didn't see a section in the application to select not to withhold taxes from distribution. I will check again.
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retiredjg
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by retiredjg »

I've never seen the form. But did you see the message above from Wiggums?
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saver1
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Re: 401k to Roth Rollover. Do I need to contribute the tax amount into Roth?

Post by saver1 »

retiredjg wrote: Thu May 06, 2021 12:34 pm I've never seen the form. But did you see the message above from Wiggums?
The form only has a checkbox for California state tax and only for direct payments to me. It does not have anything for payments that go directly to the financial institution or for federal taxes. Maybe the from has changed since Wiggums used it.

Thank you for all your input!
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