Roth IRA conversion strategies (when and how much) for 2022

[DSBH]

So we did our homework, and plan to convert X dollars in 2022. Our current plan (or course subject to change) is to:

1. Convert 5 times a year, around 4 deadlines for 1040-ES (mid Jan, Apr, Jun, Sep) and end of December once distributions are known.
2. Convert about 20% of X each time,
3. Advance my next conversion (e.g. Apr 15 plan) for each 5% stock market decline (e.g. if market drops by 5% in Mach from 2021 ending value).

If you decide to do Roth conversion this year:

1. When do you plan to convert,
2. How much of X if multiple conversions in a year, and
3. Any contingency plan(s)?

Thanks!

[thor111]

Plan on waiting 'til the end of the year. I'm worried about going over the IRMAA threshholds, so I need to understand how much room I have.

[james22]

New to retirement, I'm still spending money on one-time big ticket items.

So I'll wait until year's end.

Right now it's not looking like I'll be able to convert anything in the 24% bracket.

[alpenglow]

I'm not retired, so I adjust my W4 to cover the taxes on conversions. At the start of the year, I calculate the approximate amount that I'll be able to convert in the 12% bracket. I convert 80% of that at the start of the year. Even though my pay is fairly constant, sometimes I'll make more than I think. After my final paycheck, I convert whatever room remains up to the top of the 12% bracket.

[Leif]

I'm planning 4X/year conversion. March, June, September, and December. Each time will be 25% of amount to be converted. Unless, we are in a bear market. In that case I will increase my conversion amount by 50% (37.5% of total year conversion). I have other tiers above 30% to convert more. The final conversion in December will true up to the amount to be converted. I would probably increase my total planned conversion if the market is way down (> 40%).

[tibbitts]

I try to spread my conversions over the year, although I try to do a little more when the market seems to be down - although as with DCA that strategy is not likely to pay off.

This is my first full year of IRMAA but I'd go through an IRMAA tier and through NIIT if there was a huge drop in the market, as in early 2020. At that time I didn't yet realize the extent of conversions I'd want to do (and the market performance since then has added to the amount that makes sense to convert, of course.)

[retiredjg]

I convert at the end of the year when I know what my other income will be. My goal is to stay under IRMAA.

[N.Y.Cab]

Another one waiting till year end to do Roth conversion. Need to fill out the below calculator to keep AGI between IRMAA first cliff estimates for 2023 and 2024.

https://www.mortgagecalculator.org/calc ... ulator.php

[AlphaLess]

New to retirement, I'm still spending money on one-time big ticket items.

So I'll wait until year's end.

Right now it's not looking like I'll be able to convert anything in the 24% bracket.

I am starting to look into this.

Seems like the 22% and 24% bracket length for MFJ is quite long:

from $81K to $320K.

In retirement, I think just the dividends, etc, in taxable would take us way over $80K.
But we might have room under $320K.

After the 24% bracket is over, we get to the 32%, which is good, but close to the 37%.

[terran]

I'm not sure I see the advantage of converting that often. If you want to maximize time in the Roth under the thinking that the market goes up on average then I would convert once at the beginning in an amount you're almost certain you want to convert, and then convert once more at the end of the once you know what all your sources of income will be and dividends have been announced so you know exactly how much you can convert and still hit whatever targets you set.

Pay estimated taxes in 4 equal installments such that you hit one of the safe harbors to avoid an underpayment penalty:

1. owe less than $1,000 in tax after subtracting payments,
2. pay at least 90% of the tax for the current year, or
3. pay at least 100% (110% if AGI is over $150k) of the tax shown on the return for the prior year

[carminered2019]

Best time to convert is when the markets drop the lowest.

[Running Bum]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal. Well short if it's an ACA cliff. I track taxable income throughout the year, and in December I start double checking and honing in on my final conversion number as dividend estimates come in, but I don't actually do the final calculation and conversion until the last dividend actually shows up. Those estimates are often pretty far off the actual amount. I still leave some buffer in case of any surprises, buffer size depending on whether its a cliff or just marginal income that would be taxed higher.

[DSBH]

I'm not sure I see the advantage of converting that often. If you want to maximize time in the Roth under the thinking that the market goes up on average then I would convert once at the beginning in an amount you're almost certain you want to convert, and then convert once more at the end of the once you know what all your sources of income will be and dividends have been announced so you know exactly how much you can convert and still hit whatever targets you set.

I have previously read about this approach on bogleheads, certainly acceptable to me. I wanted to convert multiple times if I think, correctly or incorrectly, that there are a lot of volatilities in the market - “feel good” sort of thing.

[Tony-S]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

[terran]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.

[Tony-S]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.

Ok, thanks.

[james22]

New to retirement, I'm still spending money on one-time big ticket items.

So I'll wait until year's end.

Right now it's not looking like I'll be able to convert anything in the 24% bracket.

I am starting to look into this.

Seems like the 22% and 24% bracket length for MFJ is quite long:

from $81K to $320K.

In retirement, I think just the dividends, etc, in taxable would take us way over $80K.
But we might have room under $320K.

After the 24% bracket is over, we get to the 32%, which is good, but close to the 37%.

Single, I've only to $170,050 plus the standard deduction of $12,950 (total $183,000).

Looking like I'll spend very close to that this year.

Hate to convert at 32%, and wouldn't allow me convert much more anyway ($45,900).

59 this year, I've still some years left.

(If I knew I wanted to convert the additional $45,900, I would do it now.)

[Indyhou]

I started doing Roth conversions after I retired in 2014.

For the first 3 years of retirement, we converted four times per year timed with our estimated tax filings. We generally converted up through the 15% tax bracket then in effect. At this point we were largely living off funds outside of our tIRAs (including taxes).

Starting in 2018 several things changed. First, marginal tax rates changed due to the “Tax Cut and Job’s Act of 2017”. The reduced marginal rates made converting into the 24% tax bracket attractive (especially if you think taxes will revert to pre-2018 rates after 2026 as the law is currently written). Also, I was at a point where I didn’t want to keep drawing funds out of my non-tIRA funds.

So, starting in 2018 we have been doing one Roth Conversion toward the end of year (usually in early December after all year end distribution estimates are published). I calculate my estimated taxes for the year and withhold taxes through Vanguard as part of the conversion.

Roth conversions have been causing the largest part of our tax bill for the last several years so we’ve adapted a “pay as you go” strategy. If for some reason we don’t do the conversion then we don’t have to get the quarterly payments back as a refund.

[WoodSpinner]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.

Terran,

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

This eliminates the need for Estimated taxes and the worry about Lumpy income.

You do need to make sure you hit a Safe Harbor for the taxes paid.

It’s much less stressful (IMHO).

Typically I convert 4 times a year plus a fifth IRA Withdrawal that is withheld for taxes.

I did a historical review and typically a conversion in January works best. That said, I do love a deal and am always hopping to convert during a downturn (hence the 4 conversions). It worked great in 2018 and 2020 but not so well for 2021. Must admit it was a bit stressful so I may shift back to a simpler approach, January and December (withholding).

WoodSpinner

WoodSpinner

[jeffyscott]

If you decide to do Roth conversion this year:

1. When do you plan to convert,
2. How much of X if multiple conversions in a year, and
3. Any contingency plan(s)?

Planning on 10 in approximately equal amounts, approximately equally spaced through the year. Did the first one today.
My, non-specific, contingency plan would be to accelerate that, if there were to be a large decline.

Rather than convert all at the beginning of the year, based on the idea that the market goes up on average, I like to hold back in case of a decline to give it a silver lining. If the market goes down, I get to convert more shares. And if it only goes up, I have more money, despite the sub optimal conversion decision.

[retiredjg]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

[yog]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

WoodSpinner mentioned you need to hit a Safe Harbor.

For example, if you owe less than $1,000 in federal tax at normal tax filing time, you've hit one of the IRS Safe Harbors. If you are paying taxes with pre-tax retirement funds, it's often easier to do a late-in-the-year IRA distribution and elect to withhold taxes at 100%, 99%, etc. You can see this IRS Safe Harbor amount called out at the top of Form 2210: https://www.irs.gov/pub/irs-pdf/f2210.pdf.

State income tax safe harbor rules may differ.

[retiredjg]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

WoodSpinner mentioned you need to hit a Safe Harbor.

For example, if you owe less than $1,000 in federal tax at normal tax filing time, you've hit one of the IRS Safe Harbors. If you are paying taxes with pre-tax retirement funds, it's often easier to do a late-in-the-year IRA distribution and elect to withhold taxes at 100%, 99%, etc. You can see this IRS Safe Harbor amount called out at the top of Form 2210: https://www.irs.gov/pub/irs-pdf/f2210.pdf.

State income tax safe harbor rules may differ.

I don't think meeting the safe harbor is the only thing required. There is also the requirement to pay tax as income occurs.

Woodspnner and the other poster (name forgotten) seem to be paying tax in December on income realized for the entire year. I'm wondering why that is an exception.

[Chip]

I don't think meeting the safe harbor is the only thing required. There is also the requirement to pay tax as income occurs.

Woodspnner and the other poster (name forgotten) seem to be paying tax in December on income realized for the entire year. I'm wondering why that is an exception.

It is because withholding (vs. an estimated payment) is treated as having occurred over the entire year, regardless of when it actually occurred. See this in action by looking at the calculations on Form 2210.

[WoodSpinner]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

Withholding is assumed to have been paid throughout the year (unlike estimated taxes).

That said, I don’t make the rules but do follow them.

WoodSpinner

[WJAM576082]

Good Morning! I’ve been a lurker for 2 years, signed up last year, promptly lost my log-in data (phone mishap), and finally gave up the faulty recollections and signed up anew. So this is my first post and will open it with a thank you to all the brilliant people who have aided my unexpected (and early) retirement immeasurably. I can’t remember all of you who deserve a particular pat-on-the-back, but here’s a few…klang-fool, nedsaid, retiredjg, Taylor Larimore…many more that currently escape me. At any rate, a hearty thank you for your time and expertise.

Now to the topic at hand.

We plan to convert all the way up to the top of the 24% tax bracket in two clumps: 90% in April, the remainder in December. Our income should be lump-less starting this year, as spouse officially retired starting…now. We began our conversion plan in 2019 and have targeted the current 24% bracket all along. Our rationale for targeting the 24% bracket was: [a] our calculations indicated we could blow through the current 24% bracket when RMDs kick in; [ b] we were 92% tIRA and only 8% Roth; [c] failure to convert early meant IRMAA would seize our spare bedroom later — and permanently — when we became eligible for Medicare; and [d] calculations showed that pensions and {later} SS would keep us in the current 22% bracket anyway, which may (or may not) morph into 25% in 2026. I make no predictions here, nor opine on policy…just giving our rationale, since one must make SOME assumptions when planning for the future (and I freely acknowledge I may be wrong). The only reason we’re not doing 100% promptly is because Spouse is a niche musician who has ALREADY been asked to fill in for an associate. Thus, spouse may have a nibble or two of side income for which we should leave room.

As to ‘why April” and not now: [a] want to finalize 2021 taxes first, and [ b] need to move 403b to spouse’s tIRA so we can convert part of that.

[retiredjg]

Chip and Woodspinner, thanks. I see what you mean.

I had just assumed that "withholding" meant "withholding throughout the year as income is realized". And maybe that is what the IRS intended, but the form does not ask for that....it just asks for the total.

[Fortitude]

I’m retired, but pre SS and pre IRMAA.

For my first two conversions, I waited until the end of the year. Beginning with the third one in 2021, I’ve done conversions throughout the year, but not on a set time schedule. I do wait for market down turns to perform the conversions, but I look at RSI to approach/hit oversold conditions to dictate when to convert rather than wait for a set percentage down turn. Depending on market conditions, sometimes I’ll act on 50 and 100 day moving averages. This seems to have served me well since the market has, with extremely few exceptions, bounced and re-established an upward trajectory off of these lows.

If these conditions aren’t met throughout the year or I haven’t converted the intended full amount by the end of the year, then I wait until the end of the year to convert the remainder in cash and transfer it to the Roth and then buy equities at the next downturn with the Roth’s cash. It’s turned out that this cash doesn’t stay there very long before it’s been used to buy equities.

2022 will be the fourth consecutive year of conversions since my first year of retirement in 2019. Thus far, the average annual rate of return on the Roth is 19.2% as of yesterday’s market close.

[DSBH]

I’m retired, but pre SS and pre IRMAA.

For my first two conversions, I waited until the end of the year. Beginning with the third one in 2021, I’ve done conversions throughout the year, but not on a set time schedule. I do wait for market down turns to perform the conversions, but I look at RSI to approach/hit oversold conditions to dictate when to convert rather than wait for a set percentage down turn. Depending on market conditions, sometimes I’ll act on 50 and 100 day moving averages. This seems to have served me well since the market has, with extremely few exceptions, bounced and re-established an upward trajectory off of these lows.

If these conditions aren’t met throughout the year or I haven’t converted the intended full amount by the end of the year, then I wait until the end of the year to convert the remainder in cash and transfer it to the Roth and then buy equities at the next downturn with the Roth’s cash. It’s turned out that this cash doesn’t stay there very long before it’s been used to buy equities.

2022 will be the fourth consecutive year of conversions since my first year of retirement in 2019. Thus far, the average annual rate of return on the Roth by employing this strategy is 19.2% as of yesterday’s market close.

Had to google RSI !

I am clueless when it comes to charting/technical analysis but glad it works for you

[neurosphere]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

Because similar to employer payroll withholding, IRA withholding is treated as if it was evenly throughout the year. One could in theory pay for a tax liability incurred in January via an IRA withholding in December.

[Leif]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

Withholding is assumed to have been paid throughout the year (unlike estimated taxes).

That said, I don’t make the rules but do follow them.

WoodSpinner

Since I use ALL the tIRA withdrawals for Roth conversions, and using cash in the taxable account to pay taxes, I need to stay with estimated taxes until RMD time.

[Fortitude]

Had to google RSI !

I am clueless when it comes to charting/technical analysis but glad it works for you :beer

When it comes to charts and technicals, I really only focus on RSI and 50, 100 and 200 daily moving averages and looking at trend lines as information that I believe are helpful in making some decisions. Everything else, at least to me, is noise and something one can easily get carried away with.

I completely stay away from things like “head and shoulders pattern” and the other terms that are used to describe so called triggers to make investment moves. When I see these so called analysts and traders on TV pointing them out, I often can’t see what they “see” and it seems like they draw what they want to see on the chart. When they do this, I feel like I’m looking at a Rorschach ink blot test where everyone sees something different.

At least with RSI and 50, 100 and 200 daily moving averages, I know I’m dealing with data that I feel helps lay out for me what the market is actually doing.

[Mullins]

Chip and Woodspinner, thanks. I see what you mean.

I had just assumed that "withholding" meant "withholding throughout the year as income is realized". And maybe that is what the IRS intended, but the form does not ask for that....it just asks for the total.

One more point about estimated payments... unless I'm mistaken, my understanding is if you've satisfied the Safe Harbor Rule then it won't matter when you paid the estimated tax (as long as it's by the last due date). It's only when you underestimated payments that the Fed and State seek to determine if your estimated payments were correctly calculated and on time. If they're not correct, it's then they assess a penalty.

[neurosphere]

Chip and Woodspinner, thanks. I see what you mean.

I had just assumed that "withholding" meant "withholding throughout the year as income is realized". And maybe that is what the IRS intended, but the form does not ask for that....it just asks for the total.

One more point about estimated payments... unless I'm mistaken, my understanding is if you've satisfied the Safe Harbor Rule then it won't matter when you paid the estimated tax (as long as it's by the last due date). It's only when you underestimated payments that the Fed and State seek to determine if your estimated payments were correctly calculated and on time. If they're not correct, it's then they assess a penalty.

But wait, there is more than one way to satisfy a Safe Harbor and can include making estimated payments of a certain amount and by certain due dates. I suppose what you mean is that if you have already satifisfied the safe harbor solely via withholding, then yes, it'd doesn't matter when you make estimated payments because you don't have to make ANY and can simply pay any extra tax due by the time of the April filing deadline.

[Chip]

One more point about estimated payments... unless I'm mistaken, my understanding is if you've satisfied the Safe Harbor Rule then it won't matter when you paid the estimated tax (as long as it's by the last due date). It's only when you underestimated payments that the Fed and State seek to determine if your estimated payments were correctly calculated and on time. If they're not correct, it's then they assess a penalty.

If I'm understanding what you're saying then I believe you are mistaken. If you are satisfying the safe harbor rule via estimated payments they need to be in equal installments or front-loaded. OR, appropriately timed payments with the amounts based on the annualized income method.

[terran]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.

Terran,

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

This eliminates the need for Estimated taxes and the worry about Lumpy income.

You do need to make sure you hit a Safe Harbor for the taxes paid.

It’s much less stressful (IMHO).

Typically I convert 4 times a year plus a fifth IRA Withdrawal that is withheld for taxes.

I did a historical review and typically a conversion in January works best. That said, I do love a deal and am always hopping to convert during a downturn (hence the 4 conversions). It worked great in 2018 and 2020 but not so well for 2021. Must admit it was a bit stressful so I may shift back to a simpler approach, January and December (withholding).

WoodSpinner

WoodSpinner

Definitely a good option if you're old enough not to owe a penalty (over 59.5) as the withholding will count as a withdrawal, and want to withdraw from traditional IRA. If you're too young such that withholding/withdrawal will be subject to a 10% early withdrawal penalty or would prefer to get more into Roth while paying the taxes from outside sources then you'd be better off paying estimated taxes.

[neurosphere]

One more point about estimated payments... unless I'm mistaken, my understanding is if you've satisfied the Safe Harbor Rule then it won't matter when you paid the estimated tax (as long as it's by the last due date). It's only when you underestimated payments that the Fed and State seek to determine if your estimated payments were correctly calculated and on time. If they're not correct, it's then they assess a penalty.

If I'm understanding what you're saying then I believe you are mistaken. If you are satisfying the safe harbor rule via estimated payments they need to be in equal installments or front-loaded. OR, appropriately timed payments with the amounts based on the annualized income method.

I suspect they mean if the safe harbor rule is met solely via withholding. See my post/reply just before your reply.

[JackBoglereader21]

Thank you all for sharing some helpful strategies. A friend who inherited an IRA told me he basically draws an additional $18,000 above RMD .. nets $12,000 and uses that $12,000 to fund his/her Roth IRAs. He spouse works, max out 401k but their tax bracket allows them to fund Roth. They live in Southern California, don't have extra monthly to fund Roth but b/c of "tax bomb" of his IRA he is taking above RMD. I suspect they are in the 22% bracket. He has tIRAs but he says using his inherited IRA to fund annual Roth is his version of Roth conversion.

Does this seem like a good idea ?

[DSBH]

Thank you all for sharing some helpful strategies. A friend who inherited an IRA told me he basically draws an additional $18,000 above RMD .. nets $12,000 and uses that $12,000 to fund his/her Roth IRAs. He spouse works, max out 401k but their tax bracket allows them to fund Roth. They live in Southern California, don't have extra monthly to fund Roth but b/c of "tax bomb" of his IRA he is taking above RMD. I suspect they are in the 22% bracket. He has tIRAs but he says using his inherited IRA to fund annual Roth is his version of Roth conversion.

Does this seem like a good idea ?

The 33% incremental tax cost (12K net from 18K withdrawn) appears high to me, for a 22% bracket.

[JackBoglereader21]

Thank you all for sharing some helpful strategies. A friend who inherited an IRA told me he basically draws an additional $18,000 above RMD .. nets $12,000 and uses that $12,000 to fund his/her Roth IRAs. He spouse works, max out 401k but their tax bracket allows them to fund Roth. They live in Southern California, don't have extra monthly to fund Roth but b/c of "tax bomb" of his IRA he is taking above RMD. I suspect they are in the 22% bracket. He has tIRAs but he says using his inherited IRA to fund annual Roth is his version of Roth conversion.

Does this seem like a good idea ?

The 33% incremental tax cost (12K net from 18K withdrawn) appears high to me, for a 22% bracket.

They are probably calculating 22% Fed and 9.3 State (CA). I assume they are under $200k income limit since they can contribute to a Roth.

https://www.nerdwallet.com/article/taxe ... -state-tax
https://www.nerdwallet.com/article/taxe ... x-brackets

I am wondering if anyone else here has an inherited IRA and employs this method as their Roth conversation.

[Mr.BB]

I am planning on doing 3 or 4 Roth conversions this year. Does it matter if I calculate that amount in to my quarterly tax payments or can I just owe it when I pay my taxes next year?
Also, do they send you one 1099 form or do they send you a separate one for each conversion?

[WoodSpinner]

Actually there is an additional option (which I prefer)…

In December do a IRA Withdrawal and have it withheld for your Fed/State taxes.

I just saw a similar suggestion in a different thread.

Educate me....taxes are supposed to be paid all along the way as you make your money. Why is this an exception?

Withholding is assumed to have been paid throughout the year (unlike estimated taxes).

That said, I don’t make the rules but do follow them.

WoodSpinner

Since I use ALL the tIRA withdrawals for Roth conversions, and using cash in the taxable account to pay taxes, I need to stay with estimated taxes until RMD time.

Leif,

Nothing stops you from paying the taxes via Witholding and then moving funds from Taxable to Roth.

Just do it once a year (it becomes an Indirect Rollover).

WoodSpinner

[DSBH]

I am planning on doing 3 or 4 Roth conversions this year.
…
Also, do they send you one 1099 form or do they send you a separate one for each conversion?

I did 2 conversions in 2020 and got one 1099 from Vanguard, don’t have 1099 for 2021 yet but expect the same.

[Leif]

Leif,

Nothing stops you from paying the taxes via Witholding and then moving funds from Taxable to Roth.

Just do it once a year (it becomes an Indirect Rollover).

WoodSpinner

I would rather pay taxes from my taxable account to maximize that amount converted to Roth. I can use my taxable account to pay estimated taxes. By using an indirect rollover I'm either reducing the amount to the Roth or increases taxes. Neither of those options appeal to me.

In any case I don't find it too much of a burden to pay estimated taxes quarterly. I just set it up via webpay.

[WoodSpinner]

Leif,

Nothing stops you from paying the taxes via Witholding and then moving funds from Taxable to Roth.

Just do it once a year (it becomes an Indirect Rollover).

WoodSpinner

If you are saying I can withdrawal from my tIRA to cover the Roth conversion AND to pay taxes on the conversion, then I understand that. However, that will increase my taxes. I would rather pay taxes from money already taxed in my checking account for the conversion.

If you are instead saying I can move money from my taxable account to Roth that indeed would be news to me.

In any case I don't find it too much of a burden to pay estimated taxes quarterly. I just set it up via webpay.

You absolutely can do this!

*Note the caveat, once per year (e.g. 365 days) since it’s an indirect rollover.

WoodSpinner

[Artsdoctor]

Doing small conversions throughout the year might be OK for me, but I haven't been able to anticipate any tax law stability for years now so if I'm going to do anything large, it'll be in December.

[Freefun]

Probably one time towards the end of the year when I figure out how to pay the taxes on it

[OffGridder]

In December, I estimate my total income from all sources and any deductions for the following year. I then enter those numbers in Turbo Tax to determine how much headspace I will have for Roth conversions. I then convert 75% of that amount in January and top it off in December when I know my final income and deduction numbers.

My TIRA is all in bonds, so minimal volatility.

Tax on conversion is paid from our taxable account. Calculate estimated total income tax for the year and multiply it by 90%. Then make 4 equal quarterly estimated tax payments based on that amount. Then pay the remaining 10% in April. I have never been hit with a penalty.

[DSBH]

So we did our homework, and plan to convert X dollars in 2022. Our current plan (or course subject to change) is to:

1. Convert 5 times a year, around 4 deadlines for 1040-ES (mid Jan, Apr, Jun, Sep) and end of December once distributions are known.
2. Convert about 20% of X each time,
3. Advance my next conversion (e.g. Apr 15 plan) for each 5% stock market decline (e.g. if market drops by 5% in Mach from 2021 ending value).

Well that was in January, and 2022 is almost over. We carried out pretty much the above plan and with our year-end fund distributions (cash) already in our Taxable account, we are thinking about converting up to the next tax bracket next week as we fortunately have an over-saved T-IRA.

FWIW we converted mostly from Total Bonds to Total Stock, and pay taxes out of our cash/Munis in Taxable. In the process we increase our stock AA by a small percentage.

If you decide to do Roth conversion this year:

1. When do you plan to convert,
2. How much of X if multiple conversions in a year, and
3. Any contingency plan(s)

Did/will you execute your 2022 conversion plan ? Make any change to your plan ?

[diy60]

I do a safe conversion early in the year, estimating the rest of my MAGI or taxable income and keeping short of my year end goal.

If you do a conversion early, say January, do you need to pay taxes right afterwards, or can you wait until filing taxes the next year?

To avoid a penalty you'd either need to pay estimated taxes in the quarter you had the income or pay in 4 equal installments. See my post earlier in the thread.

Sorry, but the bolded underline is not entirely accurate. Perhaps you meant for safe harbor? You can still avoid a penalty paying in unequal payments. There is no requirement that estimated taxes must be paid in equal installments to avoid a penalty. As an example, I usually pay 30/30/30/10 and perform the largest % of my Roth conversions in January, with many small conversions throughout the year. So as a baseline:
- Income is assumed to be earned equally throughout the year,
- Withholding is deemed on time and equal throughout the year, and
- Estimated taxes are credited in the quarter you pay.

So you can see, I slightly front load tax payments, as it helps me with end-of-year cash flows for annual large bills. I have never owed penalties.