Tax Withholding on Roth conversions

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retiredjg
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Tax Withholding on Roth conversions

Post by retiredjg »

This question is about how different brokerages handle tax withholding on Roth conversions. Assume that the investor must pay taxes from the IRA, not from savings or a taxable account.

I learned yesterday in this thread ( viewtopic.php?f=1&t=330511&p=5610592#p5610592 ) that one cannot withhold taxes when doing a Roth conversion from an IRA held on the brokerage platform at Vanguard. I was shocked because I routinely do this when doing Roth conversions from my own IRA which is held on the old mutual fund platform at Vanguard.

From your experience doing Roth conversions at other brokerages, can you withhold taxes or not?
02nz
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Re: Tax Withholding on Roth conversions

Post by 02nz »

I seem to recall that when I did Roth conversions at Merrill Edge, the option was offered. But this was late last year (and one of many disclaimers/messages I had to listen to on the phone) and I'm not 100% certain.
rkhusky
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Re: Tax Withholding on Roth conversions

Post by rkhusky »

So far, we only know that you can't do it online. Any confirmation that Vanguard won't do it if you call and ask?

There are penalties if you do this before age 59.5, so perhaps Vanguard has had too many complaints about people who do it unawares and now they require you to call so they can make sure.

Or perhaps they just block those who are less than 59.5? Anyone over 59.5 who can't get taxes withheld on a Roth conversion from a brokerage account?
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

Smart thinking about the age thing, but no....

https://support.vanguard.com/tutorials/roth-conversion
  • Step 6
    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. You can choose to receive a tax withholding notice via U.S. Mail or registered email address. Once you’ve made your election, click “Continue.”

However, the way that is worded, it certainly seems likely that one might be able to do withholding on the phone.
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Svensk Anga
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Re: Tax Withholding on Roth conversions

Post by Svensk Anga »

Seems like a non-issue to me. If you must raid the IRA for the taxes, do two transactions. One, convert what you want to Roth. Two, withdraw what you need for taxes and have the broker withhold substantially all of the withdrawal. (I don't know that they will withhold 100%.) You could even do the first transaction early in the year, to get tax-free gains in the Roth (well, most of the time) and then do step two toward the end of the year, with the potential to realize gains on the withdrawn amount in the interim.
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FIREchief
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Re: Tax Withholding on Roth conversions

Post by FIREchief »

Let's add this to our master list of how VG fails to provide the consumer with tools they want/need to accomplish their objectives. :annoyed
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
smc1234
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Re: Tax Withholding on Roth conversions

Post by smc1234 »

My wife and I have accounts at Vanguard and recently did a rollover from a traditional IRA to a Roth IRA. We called in by phone and we had to have taxes withheld from the traditional IRA. We were taking out $50,000, $40,000 to move to the Roth and $10,000 to pay taxes. The agent put the $40,000 into the settlement fun in the Roth IRA. He couldn't put it directly into the funds that we wanted it in. The next day we went in online and did that. Then we had the $10,000 to pay $7500 to federal taxes and $2500 to the state. We had $280 in the settlement fund in the traditional IRA from a CD that had just come in. We wanted to move the $280 into our taxable money market anyway. So, the agent did that in the same transaction that we paid our federal and state taxes.
Chip
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Re: Tax Withholding on Roth conversions

Post by Chip »

retiredjg wrote: Sat Nov 21, 2020 2:11 pm From your experience doing Roth conversions at other brokerages, can you withhold taxes or not?
I haven't withheld taxes from conversions at Fidelity, but I remember having to check a box saying that I didn't want them withheld. So I assume I could have, if desired.
Nahtanoj
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Re: Tax Withholding on Roth conversions

Post by Nahtanoj »

At Schwab, you can have taxes withheld when you withdraw from an IRA, and the same is true when you withdraw from an IRA to rollover to a Roth. A family member did this a few weeks ago. (This was a rollover of cash to a Roth - don't know if the same would be true for a transfer in kind of shares to a Roth.)
2cents2
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Re: Tax Withholding on Roth conversions

Post by 2cents2 »

Chip wrote: Sun Nov 22, 2020 5:42 am
retiredjg wrote: Sat Nov 21, 2020 2:11 pm From your experience doing Roth conversions at other brokerages, can you withhold taxes or not?
I haven't withheld taxes from conversions at Fidelity, but I remember having to check a box saying that I didn't want them withheld. So I assume I could have, if desired.
If you check that box it won't let you do the conversion online. From the web site "(We don't currently support tax withholding for this transfer online. To have have taxes withheld now and finish your transfer, call Fidelity at 800-544-6666.)"

I was thinking about the work around for this to accomplish the task online. 1. convert funds to Roth. 2. take a regular IRA distribution (to cover the tax bill) and set the taxes to the highest percentage. (I don't think you can set it at 100%). From the web site: "Federal and state tax withholding amounts, when combined, cannot equal or exceed your withdrawal amount. Adjust your state or federal tax withholding amounts so the combined total is less than your withdrawal amount."
(Or you could call...)
marcopolo
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Re: Tax Withholding on Roth conversions

Post by marcopolo »

Does it even make sense to do a Roth conversion if you have to pay taxes from the conversion? That would seem to pretty significantly reduce the benefit of the transaction.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

marcopolo wrote: Sun Nov 22, 2020 12:29 pm Does it even make sense to do a Roth conversion if you have to pay taxes from the conversion? That would seem to pretty significantly reduce the benefit of the transaction.
Yes, I think it makes sense. I will never be in a lower bracket and I have some room available in my current bracket. My RMDs should not be large, but could push me up a bracket in later years if I live that long. If I don't live that long, my heirs will get more Roth and less traditional because of the conversions.

Just giving Uncle Sam what he owns already, but on my schedule, not his.
Horsefly
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Re: Tax Withholding on Roth conversions

Post by Horsefly »

marcopolo wrote: Sun Nov 22, 2020 12:29 pm Does it even make sense to do a Roth conversion if you have to pay taxes from the conversion? That would seem to pretty significantly reduce the benefit of the transaction.
This.

If you pay the taxes out of the money you are taking out to convert, it significantly reduces the value of doing the conversion in the first place. We do pretty big conversions every year, but if I didn't have money in my taxable account to pay the taxes, I'm not sure I would bother.
Indyhou
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Re: Tax Withholding on Roth conversions

Post by Indyhou »

Thanks for pointing this out. I did a withholding from a Roth conversion earlier this year on the Vanguard website without any problem.

I've since "upgraded" my IRA to a brokerage account, and it appears that the web site will no longer allow you to withhold taxes on a Roth conversion. This seems to only be a problem with brokerage accounts.

However, the website appears to allow you to withhold taxes if you do a cash withdrawal from the IRA.

So, as suggested above, you can probably do a conversion, then do a separate cash withdrawal set up to withhold the amount of taxes you want paid.

As an aside- we still have one IRA account that I did not change to a brokerage account. This account still allows you to withhold taxes from a conversion.

IMO this is a problem with the Vanguard web site. I have yet to see any benefit to converting to a brokerage account....
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

Horsefly wrote: Sun Nov 22, 2020 3:36 pm
marcopolo wrote: Sun Nov 22, 2020 12:29 pm Does it even make sense to do a Roth conversion if you have to pay taxes from the conversion? That would seem to pretty significantly reduce the benefit of the transaction.
This.

If you pay the taxes out of the money you are taking out to convert, it significantly reduces the value of doing the conversion in the first place. We do pretty big conversions every year, but if I didn't have money in my taxable account to pay the taxes, I'm not sure I would bother.
For you maybe. For me, the value of conversions is to reduce the small possibility the RMDs will push me up a bracket. The value for my heirs is more Roth, less tIRA. Neither of those benefits go away because the taxes come from the IRA instead of savings/taxable.
neilpilot
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Re: Tax Withholding on Roth conversions

Post by neilpilot »

retiredjg wrote: Mon Nov 23, 2020 8:29 am
Horsefly wrote: Sun Nov 22, 2020 3:36 pm
marcopolo wrote: Sun Nov 22, 2020 12:29 pm Does it even make sense to do a Roth conversion if you have to pay taxes from the conversion? That would seem to pretty significantly reduce the benefit of the transaction.
This.

If you pay the taxes out of the money you are taking out to convert, it significantly reduces the value of doing the conversion in the first place. We do pretty big conversions every year, but if I didn't have money in my taxable account to pay the taxes, I'm not sure I would bother.
For you maybe. For me, the value of conversions is to reduce the small possibility the RMDs will push me up a bracket. The value for my heirs is more Roth, less tIRA. Neither of those benefits go away because the taxes come from the IRA instead of savings/taxable.
You are correct. All that goes away is the potential to maximize the amount of capital that's in tax free status.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

neilpilot wrote: Mon Nov 23, 2020 9:08 am You are correct. All that goes away is the potential to maximize the amount of capital that's in tax free status.
Yep. Not much of a loss since I don't have that option anyway. :D

After I start RMDs, I should have a little bit of a taxable account that I can pay the taxes out of. If I continue Roth conversions, I may do that.
rkhusky
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Re: Tax Withholding on Roth conversions

Post by rkhusky »

Sounds like you can call Vanguard and pay taxes along with doing the conversion.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

rkhusky wrote: Mon Nov 23, 2020 10:17 am Sounds like you can call Vanguard and pay taxes along with doing the conversion.
Yes. Sounds like both Vanguard brokerage and Fidelity will do it that way. But Schwab appears to allow withholding. Those are the ones I was interested in, but would not mind hearing about other places if others want to comment.
humblecoder
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Re: Tax Withholding on Roth conversions

Post by humblecoder »

As a tangential question, when you have taxes withheld for a Roth conversion, is that money considered to be converted or un-converted?

As an example, let's say I want to convert $50K and but I want to withhold 20% of that ($10K) for taxes. There are two possible ways to structure this

1. Convert $50K from trad to Roth, and withdraw $10K post-conversion from the Roth for taxes, OR
2. Convert $40K from trad to Roth, and withdraw an additional $10K from Traditional for taxes

The reason why I ask is that this makes a difference for those of us who are under 59.5.

For #1, you are essentially withdrawing money from your Roth. If you have at least $10K in contributions already in your Roth, this $10K would then come out of your contribution bucket due to the Roth IRA withdrawal ordering rules. You'd of course still pay tax on the $50K that you converted. However, since if the withholding comes from contributions, you wouldn't have to pay a 10% penalty if you are under 59.5 since contribution withdrawals are tax free.

The same logic would apply if you have previous conversions that are over 5 years old, since those withdrawals are also not subject to the 10% penalty (withdrawals of Roth conversions under 5 years old ARE subject to the 10% penalty)

For #2, you are essentially withdrawing money from your traditional IRA. If you are under 59.5, you are going to pay the 10% penalty on the money that is withheld.

Therefore, I would conclude that if you are under 59.5, #1 is preferable from a tax standpoint. However, I don't know how brokers would treat this transaction. If they treat it as #2, then a better way to do it would be to convert $40K to Roth, DON'T have the broker withhold anything, and then make a separate tax free withdrawal of $10K from your Roth tax free to pay the conversion taxes.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

My understanding is that $50k would be withdrawn from tIRA and $10k of that would be sent to Uncle Sam for taxes....meaning $10k does not make it into the Roth IRA....which would trigger a penalty for a person under 59.5.

Edited to add....I did my conversion today and it definitely withholds the taxes before conversion. Meaning, that money does not go to Roth and come back out before going to Uncle Sam.

After I told it what percentage to withhold in taxes, it told me the number of dollars that would be going to Roth IRA and it was not the total amount.

Old mutual fund platform, not brokerage platform.
Last edited by retiredjg on Mon Nov 23, 2020 2:39 pm, edited 2 times in total.
ChrisC
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Re: Tax Withholding on Roth conversions

Post by ChrisC »

Wells Fargo brokerage IRAs do not permit online Roth conversions but it processes paper conversion requests same day when forms are faxed to it. Wells Fargo allows tax withholding on the conversion ( and actually will allow you to send the withheld amount in 60 days to Wells so that you’ve effectively converted the full amount designated for the conversion).

I’ve found that you have to stay on top of conversions, transfers and distributions. Wells Fargo once converted my wife’s entire brokerage IRA when she asked for a partial conversion and Wells had to unwind its mistake. Recently, TRowe Price rolled over my entire 401k to TSP though I only requested a third of it to be transferred. TRowe had to place a stop order on the check to TSP, make me whole for the mistake, and we had a 3-way conference call to make sure my original request with another roll over check was correctly processed. If I hadn’t caught this mistake and TSP processed the check emptying out my TRowe Price account, I’m not sure how things would have been squared.
Last edited by ChrisC on Mon Nov 23, 2020 1:44 pm, edited 1 time in total.
RetiredAL
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Re: Tax Withholding on Roth conversions

Post by RetiredAL »

I was playing with this over the weekend at Fidelity in preparation for an upcoming conversion.

On-line conversion is avail only if no tax w/h is involved. If you want tax w/h, you have to call.

In the past, I was told this was so they could verify if the conversion deposit amount was going to be net ( IRA $ - the taxes ) or Gross UP where the amount you deposited as a conversion is the face amount and they compute the gross up amount for the withdrawal needed to pay the taxes. I guess too many people screwed up with this concept, so Fido decided to force people to talk with a Rep so they could verify your intentions.

Of note, a normal IRA withdrawal on-line allows one to enter the desired Fed Tax w/h %, and in my case, the CA Tax can also be selected to be either 10% of the Fed Tax $, or zero. Thus I could convert on-line with no tax w/h and then do a normal withdrawal at a 90% w/h rate. A $1000 withdrawal at 90% w/h would have $900 of Fed Tax and $90 of State Tax w/h, and $10 deposited to either my checking or my taxable account.
aristotelian
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Re: Tax Withholding on Roth conversions

Post by aristotelian »

Why would you want to? If you have the option of paying out of pocket versus making a forced withdrawal from your Roth account, wouldn't you prefer to pay out of pocket to maximize your Roth? Would you also want taxes deducted from your Roth contribution? I would say this is a feature, not a bug. Especially if there is a chance of getting any of those taxes back in your refund you will have in effect made a withdrawal for no purpose.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

aristotelian wrote: Mon Nov 23, 2020 1:48 pm Why would you want to? If you have the option of paying out of pocket...
Not everyone has that option.
aristotelian
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Re: Tax Withholding on Roth conversions

Post by aristotelian »

retiredjg wrote: Mon Nov 23, 2020 2:33 pm
aristotelian wrote: Mon Nov 23, 2020 1:48 pm Why would you want to? If you have the option of paying out of pocket...
Not everyone has that option.
I'm trying to imagine a case where I'd do a Roth conversion rather than a withdrawal and not have enough cash to pay the taxes. Worst case you could just withdraw as much as you need from the Roth.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

aristotelian wrote: Mon Nov 23, 2020 3:14 pm
retiredjg wrote: Mon Nov 23, 2020 2:33 pm
aristotelian wrote: Mon Nov 23, 2020 1:48 pm Why would you want to? If you have the option of paying out of pocket...
Not everyone has that option.
I'm trying to imagine a case where I'd do a Roth conversion rather than a withdrawal and not have enough cash to pay the taxes. Worst case you could just withdraw as much as you need from the Roth.
I don't need to do withdrawals. My goal is to move money from tiRA to Roth IRA. The only way to do that is to send Uncle Sam his share of it.
aristotelian
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Re: Tax Withholding on Roth conversions

Post by aristotelian »

retiredjg wrote: Mon Nov 23, 2020 3:21 pm
aristotelian wrote: Mon Nov 23, 2020 3:14 pm
retiredjg wrote: Mon Nov 23, 2020 2:33 pm
aristotelian wrote: Mon Nov 23, 2020 1:48 pm Why would you want to? If you have the option of paying out of pocket...
Not everyone has that option.
I'm trying to imagine a case where I'd do a Roth conversion rather than a withdrawal and not have enough cash to pay the taxes. Worst case you could just withdraw as much as you need from the Roth.
I don't need to do withdrawals. My goal is to move money from tiRA to Roth IRA. The only way to do that is to send Uncle Sam his share of it.
That makes no sense but you can always withdraw from the Roth if you want to pay taxes from the Roth. I would prefer to let it grow.
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WoodSpinner
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Re: Tax Withholding on Roth conversions

Post by WoodSpinner »

aristotelian wrote: Mon Nov 23, 2020 8:24 pm
retiredjg wrote: Mon Nov 23, 2020 3:21 pm
aristotelian wrote: Mon Nov 23, 2020 3:14 pm
retiredjg wrote: Mon Nov 23, 2020 2:33 pm
aristotelian wrote: Mon Nov 23, 2020 1:48 pm Why would you want to? If you have the option of paying out of pocket...
Not everyone has that option.
I'm trying to imagine a case where I'd do a Roth conversion rather than a withdrawal and not have enough cash to pay the taxes. Worst case you could just withdraw as much as you need from the Roth.
I don't need to do withdrawals. My goal is to move money from tiRA to Roth IRA. The only way to do that is to send Uncle Sam his share of it.
That makes no sense but you can always withdraw from the Roth if you want to pay taxes from the Roth. I would prefer to let it grow.
Actually it makes a great deal of sense.....

If you withhold from a Roth conversion and meet your safe harbor limits, you don’t have to worry about Estimated Taxes, lumpy conversions, or increasing your conversion target.

Many people do a final conversion in December to cover the entire taxes due, since its withholding you don’t have to worry about underpayment of taxes.

WoodSpinner
aristotelian
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Re: Tax Withholding on Roth conversions

Post by aristotelian »

WoodSpinner wrote: Mon Nov 23, 2020 10:17 pm
Actually it makes a great deal of sense.....

If you withhold from a Roth conversion and meet your safe harbor limits, you don’t have to worry about Estimated Taxes, lumpy conversions, or increasing your conversion target.

Many people do a final conversion in December to cover the entire taxes due, since its withholding you don’t have to worry about underpayment of taxes.

WoodSpinner
I would rather make estimated payments than give up tax advantaged space but I suppose to each their own.
overpar
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Re: Tax Withholding on Roth conversions

Post by overpar »

What if-
you do your Roth conversion, have tax withheld, then within 60 days rollover the tax amount into your Roth out of your taxable account?
The Fidelity phone rep advised that this works, but I can't find anything on the site to confirm it.
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retiredjg
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Re: Tax Withholding on Roth conversions

Post by retiredjg »

Yes, you could do this if you want. The second part would be a 60 day rollover. Since it is a Roth conversion, there is no limit of one per year.
wtfire
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Re: Tax Withholding on Roth conversions

Post by wtfire »

I just did a Roth IRA conversion from an old tIRA last week over the phone. Both accounts were on Merrill Edge. The rep asked me whether or not I wanted to have tax withhold. I declined because it wasn't a larger conversion. Before I called them, I did check on the Merrill Edge website, it didn't seem like Roth IRA conversion could be done online.
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