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Roth conversions

Posted: Fri Jul 24, 2020 12:58 pm
by bugleheadd
As my trad IRA account grows and thinking of retirement before 59.5, i am looking mroe into doing conversion roth IRAs. as i understand i can convert as much as i want every year and just pay income taxes on it. then i have to wait 5 years (or age 59.5) to withdraw each conversion amount. if i withdraw earnings before 59.5, there is a 10% penalty plus income tax.


Do i have until Dec 31st of current tax year or Apr 15 of the following year to do a conversion that counts for the current tax year?
Is it simply clicking a transfer button from trad ira to roth ira in my brokerage account? what tax documents get generated by the brokerage?
do income taxes get deducteed automatically from the conversion amount by the brokerage, or do i have to manually cut a check (withdrawn from taxable accounts) and mail to IRS and state/local tax dept?
am i limited to only being able to convert contributions in my trad ira or is the entire amount (contributions and earnings) eligible for conversion?

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 1:02 pm
by livesoft
bugleheadd wrote: Fri Jul 24, 2020 12:58 pmDo i have until Dec 31st of current tax year or Apr 15 of the following year to do a conversion that counts for the current tax year?
Dec 31st of current tax year. Not Apr 15 of following year.

Is it simply clicking a transfer button from trad ira to roth ira in my brokerage account? what tax documents get generated by the brokerage?
Yes, if your financial vendor is Vanguard. Your financial vendor will send you a 1099-R.


do income taxes get deducteed automatically from the conversion amount by the brokerage, or do i have to manually cut a check (withdrawn from taxable accounts) and mail to IRS and state/local tax dept?
You can have taxes withheld from the conversion amount, but this would be BAD BAD BAD because the withheld taxes would be considered a withdrawal subject to a 10% penalty in your case. It would be better to pay the taxes in another way. You could make a quarterly estimated tax payment or if still working you could adjust the taxes withheld from your paychecks to account for the tax on the Roth conversion.

am i limited to only being able to convert contributions in my trad ira or is the entire amount (contributions and earnings) eligible for conversion?
No limit that I know of.

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 1:03 pm
by bugleheadd
livesoft wrote: Fri Jul 24, 2020 1:02 pm Are you talking about Roth conversions?
yes i meant to say roth conversions

Re: Roth conversions

Posted: Fri Jul 24, 2020 1:22 pm
by livesoft
I edited my post. See above.

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 1:25 pm
by bugleheadd
livesoft wrote: Fri Jul 24, 2020 1:02 pm
bugleheadd wrote: Fri Jul 24, 2020 12:58 pmDo i have until Dec 31st of current tax year or Apr 15 of the following year to do a conversion that counts for the current tax year?
Dec 31st of current tax year. Not Apr 15 of following year.

Is it simply clicking a transfer button from trad ira to roth ira in my brokerage account? what tax documents get generated by the brokerage?
Yes, if your financial vendor is Vanguard. Your financial vendor will send you a 1099-R.


do income taxes get deducteed automatically from the conversion amount by the brokerage, or do i have to manually cut a check (withdrawn from taxable accounts) and mail to IRS and state/local tax dept?
You can have taxes withheld from the conversion amount, but this would be BAD BAD BAD because the withheld taxes would be considered a withdrawal subject to a 10% penalty in your case. It would be better to pay the taxes in another way. You could make a quarterly estimated tax payment or if still working you could adjust the taxes withheld from your paychecks to account for the tax on the Roth conversion.

am i limited to only being able to convert contributions in my trad ira or is the entire amount (contributions and earnings) eligible for conversion?
No limit that I know of.
thanks for the answers

Re: Roth conversions

Posted: Fri Jul 24, 2020 1:56 pm
by McDougal
bugleheadd wrote: Fri Jul 24, 2020 12:58 pm then i have to wait 5 years (or age 59.5) to withdraw each conversion amount. if i withdraw earnings before 59.5, there is a 10% penalty plus income tax.
I could be wrong but I think you still have to wait 5 years to withdraw earnings from a Roth IRA, even after reaching age 59-1/2, unless it's for a qualifying reason. And each conversion has its own 5 year waiting period based on the tax year the conversion was made. I know, it's complicated.

Re: Roth conversions

Posted: Fri Jul 24, 2020 6:41 pm
by FiveK
McDougal wrote: Fri Jul 24, 2020 1:56 pm
bugleheadd wrote: Fri Jul 24, 2020 12:58 pm then i have to wait 5 years (or age 59.5) to withdraw each conversion amount. if i withdraw earnings before 59.5, there is a 10% penalty plus income tax.
I could be wrong but I think you still have to wait 5 years to withdraw earnings from a Roth IRA, even after reaching age 59-1/2, unless it's for a qualifying reason. And each conversion has its own 5 year waiting period based on the tax year the conversion was made. I know, it's complicated.
Once any Roth IRA has been open for five years and one is over age 59.5, all Roth IRA distributions are tax and penalty free.

See Treatment of Distributions for more.

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 6:49 pm
by marcopolo
livesoft wrote: Fri Jul 24, 2020 1:02 pm
bugleheadd wrote: Fri Jul 24, 2020 12:58 pm
Is it simply clicking a transfer button from trad ira to roth ira in my brokerage account? what tax documents get generated by the brokerage?
Yes, if your financial vendor is Vanguard. Your financial vendor will send you a 1099-R.


Is there something specific about Vanguard that other "financial vendors" don't support? That would be news to me.

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 6:57 pm
by livesoft
marcopolo wrote: Fri Jul 24, 2020 6:49 pmIs there something specific about Vanguard that other "financial vendors" don't support? That would be news to me.
Sure, "clicking" was the key verb in the question. Other vendors may require one to fill out a form and submit it; or talk to a customer service rep or something else. Vanguard lets one do the conversion online by clicking. I'm pretty certain financial vendors that support traditional and Roth IRAs will help one do conversions.

Re: Roth conversions

Posted: Fri Jul 24, 2020 7:05 pm
by swengineer
Schwab also allows you to do a traditional IRA to Roth conversion online.

Re: Roth Rollovers

Posted: Fri Jul 24, 2020 7:10 pm
by marcopolo
livesoft wrote: Fri Jul 24, 2020 6:57 pm
marcopolo wrote: Fri Jul 24, 2020 6:49 pmIs there something specific about Vanguard that other "financial vendors" don't support? That would be news to me.
Sure, "clicking" was the key verb in the question. Other vendors may require one to fill out a form and submit it; or talk to a customer service rep or something else. Vanguard lets one do the conversion online by clicking. I'm pretty certain financial vendors that support traditional and Roth IRAs will help one do conversions.
Hmmm. Maybe Vanguard has a patent on "clicking", but I don't think so.

I am quite sure I can do Roth Conversion at Fidelity by simply clicking. I would be quite surprised if most/all other brokerages did not support the same capability.

Re: Roth conversions

Posted: Fri Jul 24, 2020 7:16 pm
by tomd37
An hour before the close of market today I executed a traditional IRA to Roth IRA conversion online using the Vanguard system. The system indicated VG would automatically withhold 10% for federal tax unless I indicate that I did not want any withholding. I changed that and it went through and is now showing as a pending action for both accounts on the VG site. :D

Re: Roth conversions

Posted: Sat Jul 25, 2020 10:24 am
by jeffyscott
Apparently the process can potentially be a little confusing on Vanguard's site, maybe depending on where and how you start?

This led to terrible tax consequences for one poster recently:
viewtopic.php?f=2&t=308310#p5116471

An unlikely error, but a good warning to carefully double or triple check what you are doing when going through a partial conversion.