Roth Conversion / Private Letter Ruling

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Jewel
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Roth Conversion / Private Letter Ruling

Post by Jewel »

I could use some help!

I did an on-line Roth conversion on 2/25 for what I thought was $2,500.00. When I checked my Vanguard account a few days later to look at the trade, I was shocked to see a transaction for almost $194,000. At first, I thought Vanguard put someone else’s money in my account. But when I saw that the portfolio value didn’t increase by that much I had a sinking feeling I did something wrong. I called Vanguard right away (the confirm says to contact them immediately if the information isn’t correct) and I was told that I traded 2500 shares, not dollars, and since the law changed in 2017 they could no longer do a re-characterization. I was told to seek advice from a CPA and to submit a Private Letter Ruling to the IRS. I didn’t know what that was so I contacted the IRS right away but the agent I spoke to said that they are not allowed to discuss anything about a self-directed IRA over the phone and to go back to Vanguard. I then contacted a CPA who told me that he didn’t have any clients that this has happened to since the law changed and didn’t know how to advise me. He told me to go back to Vanguard as well.

So I contacted Vanguard again and I spoke with one of their client consultants. I conveyed to her the impact this mistake was going to have on my retirement. Since I don’t want to incur additional tax liability, I will have to take the money out of a non-taxable account, my existing Roth, to pay the taxes on the trade and to live on for the rest of the year. I will have to file for Social Security three years earlier than planned, and my Medicare premiums will go up three-fold. I also told her that when I earned the money in my existing Roth I was in the 25% tax bracket, now I am in the 12% tax bracket. This trade puts me in the 32% tax bracket. I said I would never decimate one Roth IRA to pays taxes and open another one. I also told her that there is nothing beneficial about doing a conversion of this size with my assets at my age. I’m 65.

I communicated all of this to Vanguard on a recorded line because I wanted them to know that this wasn’t about getting cold feet for doing a Roth conversion. I told her I still wanted to do my $2,500.00 trade and that I planned to convert up to$10,000 in 2020 regardless of what the market was doing. This person said she believed me and would try to see what she could do to correct it but it might take a few days to get an answer. I told her I was nervous that the longer the trade sat out there that the harder it would be to correct it with the IRS. She said that Vanguard does not report the trade to the IRS until the end of the year so I shouldn’t worry about that.

This person discussed my situation with her boss and her boss escalated it to the compliance department to research to see if they could make an exception for me. Their final answer is that since the law changed in 2017 and re-characterizations are no longer allowed, Vanguard has no mechanism to correct it. I was told to work with a CPA to prepare and submit a letter of exception to the IRS to see if they will either give approval to reverse the trade, reverse the excess contribution, or allow me to pay taxes over time. Then I got what I thought was conflicting information. I was told that there was precedent for this and that the tax code was extremely vague. Since I don’t know what the law says I’m not sure what that means. I was also told it was best not to pay taxes on the trade until all my options are vetted. Before the call ended, I asked the question, “If I had contacted Vanguard and had someone help me with the trade and they made a mistake, would Vanguard correct it?” The answer was, “yes.” So somewhere in their system they do have a mechanism for correcting it but it’s probably just for employees and not customers? That’s when I said that I was a customer for 20 years, I never had a problem before, they can research all the trades I’ve done and see how conservative I am, and shouldn’t they stand behind me on this? There was no response.

I have since contacted another CPA but he hasn’t submitted a letter of exception to the IRS either so he wasn’t able to tell me how successful the process is or if it is worth pursuing. However, he helped me by sending me a link to the IRS website about the fee the IRS charges for Private Letter Rulings. It looks like it will cost $2,800 to submit the letter. Not cheap. It’s more if you make more than $250K.

I am in over my head here and so I’m reaching out to see if anyone has experience with Private Letter Rulings, what the process is like, who best can help me, and does anyone know if there have been any favorable rulings for reversing a Roth conversion since the law changed. I have reached out to a third CPA would doesn’t have experience with PLR’s either. Contrary to what Vanguard told me, it doesn’t appear to be something a CPA usually handles. At least not the ones I spoke to.

Anything you can do to educate me or offer advice on this matter is appreciated. Also, I would like opinions on if you think I should go back to Vanguard and plead my case again. I want to know that I did everything I could to correct this mistake before I have to accept what looks like the inevitable.

Thank you.
mhalley
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Re: Roth Conversion / Private Letter Ruling

Post by mhalley »

So sorry this happened. I think you need more than just a cpa, I think you need a tax lawyer.
A reminder to us all to quadruple check before clicking. Especially in this chaotic time, a lot of people may be doing things they haven’t done before, or do infrequently, ranging from tax loss harvesting to increasing Roth conversions.
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MP123
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Re: Roth Conversion / Private Letter Ruling

Post by MP123 »

Sorry to hear about this. You may want to see if you can find an "Enrolled Agent" to help with the matter rather than a CPA.
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HueyLD
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Re: Roth Conversion / Private Letter Ruling

Post by HueyLD »

You need to contact a tax lawyer who has experience in requesting a private letter ruling.

It is not going to be cheap to fix, but it is your call.
Housedoc
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Re: Roth Conversion / Private Letter Ruling

Post by Housedoc »

I am also sorry for your predicament. I will say VG gives a few "warning" messages about your conversion and it can't be changed once submitted. Also you are presented a screen prompting for tax withholding. Also a final screen shows the dollar amounts in play before and after taxes. Good luck with your situation my friend.
Alan S.
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Re: Roth Conversion / Private Letter Ruling

Post by Alan S. »

PLR user fee is 10,000. An average legal cost for preparation and filing may be very close to 10,000 as well.

I have not heard of any PLRs approving conversion recharacterizations since these were eliminated 2 years ago. Accordingly, to spend 20k on a PLR appears likely to be a waste of money and time, particularly when VG's site includes adequate disclosures.

The only thing that might change this conclusion would be if the IRS/Congress entirely shifts gears due to the current crisis and starts making all kinds of concessions to taxpayers, perhaps even reinstating conversion recharacterizations. Without reinstated recharacterizations you would need documentation that you contacted VG to request reversal immediately after the conversion. Otherwise, the IRS is going to assume that this request was triggered by the market crash, which likely erased much of the converted value. There will be many thousands of people in that boat, and this is exactly the situation where people used to recharacterize conversions routinely.
Enkidu
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Re: Roth Conversion / Private Letter Ruling

Post by Enkidu »

Vanguard's poor user interface for Roth conversions in brokerage accounts may be the problem here. I did two Roth conversions in January, one in a brokerage account, and one in a mutual fund account. The conversion in the mutual fund account was straightforward, but the brokerage account conversion has a twist for the unwary.

I specified "sell in dollars" in my brokerage account then selected my Roth as the destination. A window pops up for the Roth conversion but the only option is to list the number of shares to convert. I thought that I made a mistake and started over with the same result. I had to look up NAV and estimate the number of shares to hit the dollar value target. There is no convert in dollars option. I could see how someone could think that the transaction was in dollars as they originally specified and just enter dollars in the share box.

This is the way traditional mutual fund accounts work, the users specifies sell or exchange in dollars once and the transaction is completed in dollars.

OP if you were using a brokerage account you may want to verify that you can start a Roth conversion in dollars but have to complete it in shares. Is this what happened to you, and you didn't catch it? You don't have to complete the transaction to verify this. Then go back to Vanguard and ask for relief because of their confusing user interface. You can't be the only person this has happened to and now there is no way to undo a conversion.
rkhusky
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Re: Roth Conversion / Private Letter Ruling

Post by rkhusky »

I just did a Roth conversion, but have done them before, so knew what to expect. I start off on the Balances page and request an Exchange. I put in the dollar amount in my tIRA account, but once I indicate that the destination is my Roth account, Vanguard asks if I want to do a Roth conversion. When I say yes, they transfer me to a different page, where I can only enter the number of shares. Vanguard gives an estimate of the dollar amount that will be converted. You also have to go through a couple of screens about taxes, where they say that you can't choose to have taxes withdrawn online, you have to call them. You have to confirm things multiple times. At the end they say that the transfer will be in-kind, which is probably why you can only enter the number of shares, why you can't convert into a different fund, and also why Roth conversions don't cause wash sales (there was a question about this a few days ago).

I believe you can also go directly to the Roth conversion page, where you never enter a dollar amount. For some reason, I always start on the Balances page.

Note that my tIRA is a brokerage account, but my Roth is a mutual fund account. Perhaps different combinations have a different process.
Topic Author
Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by Jewel »

I contacted a tax attorney. He said PLR’s are time-consuming and costly. He estimated a good deal more than $20K. He said he does not know of any favorable rulings for Roth conversions since the law changed but that doesn’t mean it hasn’t happened. He said redacted rulings are available for the public to view but there is about a one year lag time before they are posted. He also said that just because one person gets a favorable ruling doesn’t mean that the next person will. There is no precedent when it comes to PLR’s. Sobering phone call but it was what I needed to hear. I don’t think I will pursue a PLR.

Thanks, Alan, for your suggestion. I will send a letter to VG documenting the steps I took to notify them to reverse the mistake immediately and what was discussed in all of our telephone conversations. The tax attorney also thought that was a good idea. With the relief that just came down from Treasury/IRS to put off paying estimated tax payments until July 15, he said I have more time to think about things and that anything can happen between now and then given the current crisis.

Yes, when I did the trade I did not know that when trading from the same fund to the same fund in two different accounts that it will only trade in shares. I've never traded in shares before. It was the VG client consultant that explained it to me after the fact. Also, my money market fund was on the same page and the column headings for that fund had "dollars". I think that was what I was looking at and didn't realize that the column headings for my traditional IRA was different and had "shares". It wasn't until I went back onto the platform to see what I did that I figured out my mistake. Someone else told me that I should go back to VG about their unclear interface.

I've got some time to think more about this and figure out what I am going to do.

I appreciate all of your responses.

Jewel
Katietsu
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Re: Roth Conversion / Private Letter Ruling

Post by Katietsu »

I am sorry this has happened. But as you move forward, please seek advice so that the problem is not made worse. Claiming social security three years early might not be the best option. You may be able to appeal the IRMAA premium increase. You might want to set up an installment plan with the IRS to pay over 3 years. If it turns out that you will need to move forward with this conversion in place, I would come back here for more advice before making another irreversible decision.

And every time I use my brokerage app on my phone to buy, sell or transfer funds, in a few seconds with a few swipes, I think about how easy it would be to make a huge mistake.
bsteiner
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Re: Roth Conversion / Private Letter Ruling

Post by bsteiner »

Jewel wrote: Fri Mar 20, 2020 6:43 pm 1. I contacted a tax attorney. He said PLR’s are time-consuming and costly.

2. He estimated a good deal more than $20K.

3. He said he does not know of any favorable rulings for Roth conversions since the law changed but that doesn’t mean it hasn’t happened.

4. He said redacted rulings are available for the public to view but there is about a one year lag time before they are posted.

5. He also said that just because one person gets a favorable ruling doesn’t mean that the next person will.

6. There is no precedent when it comes to PLR’s.
...
I separated your first paragraph into numbered sentences to make it easier to respond.

1. It usually takes about 4 to 6 months for the IRS to issue a private letter ruling. If there's a need for a ruling sooner (which I don't think there is here) you can get expedited treatment.

2. As Alan pointed out, the IRS user fee is $10,000. Without quoting legal fees in a forum such as this, I think Alan's estimate is about right.

3. I'm not aware of any such favorable rulings either. If there were any, I think I would know about it.

4. They're available on the IRS website: https://apps.irs.gov/app/picklist/list/ ... tions.html. The IRS usually releases them about 3 months after they issue them to the taxpayer who requested the ruling.

5-6. He's correct that private letter rulings aren't precedent. That's because the degree of review within the IRS is substantially less than for a published Revenue Ruling. Generally one IRS person prepares it and a supervisor reviews it. You have to discuss the relevant authorities in a ruling request. Often you have to discuss other private letter rulings, saying that while they're not precedent they may provide an indication of the IRS' views.

I remember many years ago the IRS issued two private letter rulings a few weeks apart, ruling in different ways on the same issue. I called the head of the group at the IRS who issued the rulings and asked him about it. He said that they must have gotten it wrong on one of them. (That was in fact the case -- it was clear which one was correct.)

Another time they issued a ruling that granted relief from a statutory deadline. (The IRS can grant relief from a regulatory deadline, but not a statutory deadline.) I happened to have been dealing with the IRS person who wrote the ruling (he handled a ruling request of mine a short time before), and asked him if the ruling reflected a change in their policy on that issue. Soon thereafter the IRS rescinded it.

But the vast majority of private letter rulings are correct.

In the area of retirement benefits, there's very little authority other than the private letter rulings. After there are enough private letter rulings on an issue, we treat them as in effect being good law in the absence of any cases, regulations, or Revenue Rulings.

* * * **

I also know of a similar case. Instead of using shares instead of dollars, the taxpayer converted more dollars than he wanted, adding an extra zero to the dollar amount he wanted to convert. I think he, too, decided not to apply for a ruling.
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celia
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Re: Roth Conversion / Private Letter Ruling

Post by celia »

OP, I suggest you not touch either IRA until this is settled as that would make it harder to put things back.

Since this definitely looks like a User Interface error on the brokerage platform (the way a human interacts with a computer), what I would do is write a letter to the CEO, Mr. Buckley, explaining everything you said in the original post including your follow up calls to them but adding that it appears to be a User Interface error on their computer that is likely repeatable. (Don’t bother mentioning a CPA or PLR unless you want to note that they are irrelevant in this case. -they may go back and listen to your past phone calls so give them the dates and times, if you can, while inferring you know about that option, as they will hear it discussed on the recording.) Since this error was partly their error, you hope that it can be resolved in the way you intended, just as if you had called up, and a phone rep had done the same thing.

You should also suggest that they fix the User Interface since you are likely to not be the only person this has happened to, although you may be the person with the largest dollar value involved, due to the value of each share.

Any phone rep should be able to give you the appropriate address, even on a Saturday morning.

Your letter to the CEO will be given to a high ranking associate with the power to look into this and fix it, if need be. The part about how it impacts customers in general should be enough to spur them to do the right thing since a customer service rep error of the same kind would be corrected too.

I think you have a good chance with this approach as I think they have some responsibility here.
rkhusky
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Re: Roth Conversion / Private Letter Ruling

Post by rkhusky »

It doesn't hurt to write to Vanguard. And if you called up Vanguard within a day or two of the transaction, they might be merciful.

But don't be surprised if they pull up a screenshot showing that you confirmed a transaction of 2500 shares, with the previous closing share price, and the approximate value of $194,000 and no other funds listed, other than the one that you were converting. (assuming this was a mutual fund - perhaps ETF Roth conversion windows look different)
Oregano
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Re: Roth Conversion / Private Letter Ruling

Post by Oregano »

Jewel wrote: Wed Mar 18, 2020 6:00 pm Before the call ended, I asked the question, “If I had contacted Vanguard and had someone help me with the trade and they made a mistake, would Vanguard correct it?” The answer was, “yes.” So somewhere in their system they do have a mechanism for correcting it but it’s probably just for employees and not customers? That’s when I said that I was a customer for 20 years, I never had a problem before, they can research all the trades I’ve done and see how conservative I am, and shouldn’t they stand behind me on this? There was no response.
Vanguard can correct it's employees errors if it is documented that the client (you) requested something else. Since you entered the transaction yourself, Vanguard has no basis to override the transaction. They may believe you 100%, but that doesn't mean they can do anything about it.
Topic Author
Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by Jewel »

I just got off the phone with Vanguard. The client consultant who I spoke with before contacted me to see if I would like assistance from their financial planning group to see if they can offer any help regarding the changes with my financial situation as a result of this trade. I declined the offer but said if I changed my mind that I would contact them.

Then I told this person that I was planning on writing a letter to Vanguard to document what happened with this trade and I asked her who was the best person to send it to. She said to send it to her and to Tim Buckley, CEO. I explained that the purpose of my letter was to provide a written account of what happened, to formally ask Vanguard in writing to reverse the trade, to notify Vanguard that the user interface was confusing to someone who wasn’t accustomed to trading shares and to suggest that they put an alert on the Roth platform so someone else doesn’t make the same mistake, and that I wanted a written response back from Vanguard in case I needed it in discussions with the IRS.

This person wanted me to be aware that according to their Compliance Department that they have never made an exception for anyone since the law changed. She also said that the final screen before submitting the trade shows the dollar amount that will be transacted. In essence, even if the platform is confusing, you have one more chance before submitting the trade to see the dollar value. I must have missed that as well. I feel like such a dope.

On the news a few weeks ago there was a story of a woman who drove into a commuter train because she didn’t see that the signaling arms were down. Unbelievably, she survived. This is my railroad tracks moment. I didn’t see what was right in front of me. I’ve made mistakes in the past but I’ve never made one that had these kinds of consequences.

I’ll keep you posted on the response that I get back from Vanguard.

Thank you for all of your replies/suggestions. It’s helping me cope with this calamity.

Jewel
MrDrinkingWater
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Re: Roth Conversion / Private Letter Ruling

Post by MrDrinkingWater »

Jewel wrote: Wed Mar 18, 2020 6:00 pm <SNIP>
I will have to file for Social Security three years earlier than planned, and my Medicare premiums will go up three-fold.

... now I am in the 12% tax bracket. This trade puts me in the 32% tax bracket.
<SNIP>
Katietsu wrote: Fri Mar 20, 2020 7:13 pm I am sorry this has happened. But as you move forward, please seek advice so that the problem is not made worse. Claiming social security three years early might not be the best option. You may be able to appeal the IRMAA premium increase. You might want to set up an installment plan with the IRS to pay over 3 years. If it turns out that you will need to move forward with this conversion in place, I would come back here for more advice before making another irreversible decision.

And every time I use my brokerage app on my phone to buy, sell or transfer funds, in a few seconds with a few swipes, I think about how easy it would be to make a huge mistake.
Sorry to read about your situation, Jewel. I hope your appeal to a Vanguard executive works out well. I think member Katietsu gave you some useful advice above. You may only have higher medicare charges for one year. That'll sting if you don't get a waiver, but you can get through it.

You will also only have one year (Tax Year 2020) where you are in the 32% bracket. It is possible that you could be back in the 12% bracket for many years thereafter. Your Roth conversion was so large, could you possibly drop into the 10% bracket starting in Tax Year 2021?

Please consider asking others on this board to help you with a portfolio review.

Asking portfolio questions

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retiredjg
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Re: Roth Conversion / Private Letter Ruling

Post by retiredjg »

Making lemonade may be the best you can do with this.

Lucky for you, IRMAA only goes up for one year. You are unlikely to get an exception on this - that is not what the exceptions are intended for.

You will be in a higher tax bracket for the one year. After that, you could end up in a lower bracket than if you had not made the mistake. Or it may turn out that the conversion will benefit you in other ways (like lower RMDs). Hard to say.

Sounds like heresy, but some people have found it beneficial to actually pay the 10% penalty for early withdrawal rather than to do other things. I'd give that careful consideration before taking SS early.

This is an unfortunate situation for sure. Hope there is some silver lining. :happy
Fogler
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Re: Roth Conversion / Private Letter Ruling

Post by Fogler »

OP I feel for you. Just remember that
“Nothing in life is as important as you think it is, while you are thinking about it.”
RetiredCSProf
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Re: Roth Conversion / Private Letter Ruling

Post by RetiredCSProf »

So sorry this happened to you. I hope you are able to get it resolved. In the future, note that Roth conversions can be done only by shares, and not by dollar amounts, unless, of course, you are converting from a MM fund, where one share is one dollar.
Topic Author
Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by Jewel »

I received a response to my letter from someone on Tim Buckley’s Executive Response Team. This person, who I’ll call Joe, said he was very sorry to learn about what happened and that he checked every avenue he could to see if it was possible to override the transaction. He said if there was anyone that he wanted to make an exception for it was me and he regretted to have to tell me that there was nothing that Vanguard could do. He also said that this wasn’t something he was going to forget anytime soon and that he would bring it up for a committee review to see if Vanguard could add anymore safeguards to the website. I thanked him for his effort.

So now it’s time to move forward and try to make some lemonade. I’ll need a lot of sugar...

Jewel
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celia
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Re: Roth Conversion / Private Letter Ruling

Post by celia »

Sorry to hear this response, but at least it was quick!

For us to continue helping you, we would need to know:
How old you (and spouse?) are at the end of 2020
Tax filing status: Single vs MFJ
What your (and spouse’s?) expected SS monthly benefit would be at your Full Retirement Age(s)
Besides other known income (pension, annuity, rental income), how much more would you need to meet living expenses if you’re NOT taking SS, and if you ARE taking SS.
Ways your expenses might decrease or increase and approximate date (for example, monthly mortgage of $1,000 will be paid off in three years, will stop working at the end of the year and not have monthly salary of $xxx, aging parents will likely need home care of $1,500 per month starting in a few years that you may need to help with)
Usual federal and state tax brackets not counting this Roth conversion or SS
Approximate current size of all tax-deferred accounts and Roths and the stock to bond ratio in each of them.

There will probably be more info needed, but let’s start here. We will come up with several scenarios, and see what works best for you.
retiredjg
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Re: Roth Conversion / Private Letter Ruling

Post by retiredjg »

Jewel wrote: Sun Apr 12, 2020 6:29 pm So now it’s time to move forward and try to make some lemonade. I’ll need a lot of sugar...
At least you have a clear answer and you got it quickly. Thanks for the update.

Since you are over 59.5, there is no 10% penalty for early withdrawal from your Roth IRA as long as you do not tap into the earnings that have occurred in the Roth IRA. And if you made your first contribution to Roth IRA more than 5 tax years ago, even the earnings that have occurred in the Roth IRA are available without tax (or penalty).

I would consider the Roth IRA a potential source of money for at least part of the taxes. It may not be what you had planned, but I guess that's how lemonade works sometimes. :(

If you don't mind, it would be nice to see an update in a few months or a year to know how all this worked out for you. Good luck.
MichDad
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Re: Roth Conversion / Private Letter Ruling

Post by MichDad »

Jewel,

I've just read through all the previous posts on this thread and want to express my empathy. I truly believe you and could easily see myself making a similar type of mistake.

That said, I would like to pose a long shot idea for you to consider. You could write a detailed letter to your two US Senators and your congressional representative to see if perhaps they could intercede with the IRS on your behalf. Even if they cannot do that or their efforts don't result in a satisfactory solution for you, it might spur some sort of legislative or regulatory fix.

I'm a retired federal employee -- not from the IRS -- but believe that if I received such a letter regarding my agency's rules, I'd do what I could to assist. If I couldn't assist the letter writer because of regulatory constraints, I'd see what I could do to help others in the future.

MichDad
the way
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Re: Roth Conversion / Private Letter Ruling

Post by the way »

Jewel wrote: Sun Apr 12, 2020 6:29 pm I received a response to my letter from someone on Tim Buckley’s Executive Response Team. This person, who I’ll call Joe, said he was very sorry to learn about what happened and that he checked every avenue he could to see if it was possible to override the transaction. He said if there was anyone that he wanted to make an exception for it was me and he regretted to have to tell me that there was nothing that Vanguard could do. He also said that this wasn’t something he was going to forget anytime soon and that he would bring it up for a committee review to see if Vanguard could add anymore safeguards to the website. I thanked him for his effort.

So now it’s time to move forward and try to make some lemonade. I’ll need a lot of sugar...

Jewel
Maybe this could be treated as a "coronavirus-related distribution". According to the bill that was signed, this includes "any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020" if the individual "is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) or experiences adverse financial consequences as a result of being quarantined".

Maybe this would allow you to repay 100k of it at least. Did you ask the Response Team if they researched that aspect of it?
Alan S.
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Re: Roth Conversion / Private Letter Ruling

Post by Alan S. »

the way wrote: Mon Apr 13, 2020 2:47 pm
Jewel wrote: Sun Apr 12, 2020 6:29 pm I received a response to my letter from someone on Tim Buckley’s Executive Response Team. This person, who I’ll call Joe, said he was very sorry to learn about what happened and that he checked every avenue he could to see if it was possible to override the transaction. He said if there was anyone that he wanted to make an exception for it was me and he regretted to have to tell me that there was nothing that Vanguard could do. He also said that this wasn’t something he was going to forget anytime soon and that he would bring it up for a committee review to see if Vanguard could add anymore safeguards to the website. I thanked him for his effort.

So now it’s time to move forward and try to make some lemonade. I’ll need a lot of sugar...

Jewel
Maybe this could be treated as a "coronavirus-related distribution". According to the bill that was signed, this includes "any distribution from an eligible retirement plan made on or after January 1, 2020, and before December 31, 2020" if the individual "is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) or experiences adverse financial consequences as a result of being quarantined".

Maybe this would allow you to repay 100k of it at least. Did you ask the Response Team if they researched that aspect of it?
The distribution was instantly "repaid". It was converted to Roth.

Therefore, the only possible relief generated by qualifying for a CV distribution might be paying the conversion taxes over 3 years. The problem here is that the CARES Act does not include Roth IRAs as "eligible retirement accounts" in the definition of such. However, it is possible that the tax code sections applicable to TIRA accounts could be deemed to include Roth IRAs as eligible plans even though the code section for Roth IRAs (408A) is not listed. This needs to be clarified by the IRS.

When disaster distributions were introduced a few years back, Roth IRAs were included and specifically listed in Pub 976, and a separate Pub describing CV distributions is not close to publication. Hopefully, the IRS clarifies this issue soon. That said, the purpose of CARES was to free up tax money for taxpayer expenses, and a Roth conversion does the opposite.
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Re: Roth Conversion / Private Letter Ruling

Post by celia »

Jewel, Do you have any “incomes” this year that could be “turned off” so that your tax return for 2020 only includes the Roth conversion? For example, if you were going to stop working at the end of the year, think of additional wages
as being taxed at the highest tax rate (over $194k).

That would be somewhere around the 24-32% tax bracket if MFJ or 32-35% if Single. After you add your state rate, is it worth it to continue working if you are giving up that percentage of your income? Might it be better, at least financially, to retire now? (This is just an example of an income stream that could be turned off.)

Another example is not to start SS this year. Withdrawing from Roth would probably be better in the long run.
Last edited by celia on Mon Apr 13, 2020 10:18 pm, edited 1 time in total.
the way
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Re: Roth Conversion / Private Letter Ruling

Post by the way »

Alan S. wrote: Mon Apr 13, 2020 3:44 pm The distribution was instantly "repaid". It was converted to Roth.
And I guess there's no way to take out the Roth contribution once it's made? Eg. if OP had used the 60-day rollover method, they would still have time to put the money back into the TIRA. If they could just take the money out of the Roth, could they put it back in the TIRA before 60 days was up?

Or could they just put the money back in the TIRA now, end up with an excess contribution in the Roth, and take the Roth out (and not owe taxes)?
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celia
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Re: Roth Conversion / Private Letter Ruling

Post by celia »

the way wrote: Mon Apr 13, 2020 10:17 pm And I guess there's no way to take out the Roth contribution once it's made? Eg. if OP had used the 60-day rollover method, they would still have time to put the money back into the TIRA. If they could just take the money out of the Roth, could they put it back in the TIRA before 60 days was up?

Or could they just put the money back in the TIRA now, end up with an excess contribution in the Roth, and take the Roth out (and not owe taxes)?
No contributions were involved here, just a plain old Roth conversion that can’t be re-characterized.
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Re: Roth Conversion / Private Letter Ruling

Post by the way »

celia wrote: Mon Apr 13, 2020 10:22 pm
the way wrote: Mon Apr 13, 2020 10:17 pm And I guess there's no way to take out the Roth contribution once it's made? Eg. if OP had used the 60-day rollover method, they would still have time to put the money back into the TIRA. If they could just take the money out of the Roth, could they put it back in the TIRA before 60 days was up?

Or could they just put the money back in the TIRA now, end up with an excess contribution in the Roth, and take the Roth out (and not owe taxes)?
No contributions were involved here, just a plain old Roth conversion that can’t be re-characterized.
A Roth conversion is also called a Roth rollover, which is really just a withdrawal followed by a recontribution. Here's a paragraph from pg 29 of https://www.irs.gov/pub/irs-pdf/p590a.pdf Note the terminology
Converting From Any Traditional IRA Into a Roth IRA

Allowable conversions. You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution.
With an Indirect rollover, I get a check and then have to reinvest it in 60 days. If I put it in another TIRA, it's a regular rollover. If I put it in a Roth, it's a Roth conversion.

So I'm saying, could OP take the money out of the Roth and stick it back in the TIRA by 4/24 and call it a regular rollover? But this requires that the Roth contribution be reversed. Can that be done?

Maybe OP can see if Vanguard can relabel the contribution as an annual contribution instead of a Roth conversion contribution. That would make it an excess contribution and could then be removed.
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Re: Roth Conversion / Private Letter Ruling

Post by retiredjg »

the way wrote: Mon Apr 13, 2020 11:15 pm But this requires that the Roth contribution be reversed. Can that be done?
No. A Roth conversion cannot be undone anymore.
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Re: Roth Conversion / Private Letter Ruling

Post by Alan S. »

the way wrote: Mon Apr 13, 2020 11:15 pm
So I'm saying, could OP take the money out of the Roth and stick it back in the TIRA by 4/24 and call it a regular rollover? But this requires that the Roth contribution be reversed. Can that be done?

Maybe OP can see if Vanguard can relabel the contribution as an annual contribution instead of a Roth conversion contribution. That would make it an excess contribution and could then be removed.
No. A Roth IRA distribution cannot be rolled over to any type of account other than another Roth IRA. See IRS rollover chart:

https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

Also, Sec 408(d)(3)(A)(i) indicates that rollover contributions from an IRA to another IRA do not include Roth distributions.

If some custodian accepted such a rollover in error, it would create an excess regular contribution to the TIRA that would have to be corrected to avoid excise taxes.
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Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by Jewel »

Thank you all for your responses.

I am retired and single so no current income. I will not file for SS this year because I do no want to incur any additional tax liability. I will take from my existing Roth and some cash to live on and pay taxes. I'm thankful 1st and 2nd Qtr estimated tax payments have been extended to July 15. However, I have not given up looking for a relief valve out of this situation. Contacting Senators/Reps is a good idea.

According to my new SS statement, my SS estimate at FRA, which is later this year, is $30,180. At 70 it is $39,840.

I need to do a thorough analysis of my situation to see how I am going to move forward. I did learn from Vanguard that since I already have a Roth, I started it in 1998, that my new Roth does not have the five year restriction.

I will keep you posted on any further developments, and if I would like a review of my portfolio.

Thanks again. I appreciate all of your responses. It's really helped.

Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by hoffse »

Alan S. wrote: Thu Mar 19, 2020 11:15 am PLR user fee is 10,000. An average legal cost for preparation and filing may be very close to 10,000 as well.

I have not heard of any PLRs approving conversion recharacterizations since these were eliminated 2 years ago. Accordingly, to spend 20k on a PLR appears likely to be a waste of money and time, particularly when VG's site includes adequate disclosures.

The only thing that might change this conclusion would be if the IRS/Congress entirely shifts gears due to the current crisis and starts making all kinds of concessions to taxpayers, perhaps even reinstating conversion recharacterizations. Without reinstated recharacterizations you would need documentation that you contacted VG to request reversal immediately after the conversion. Otherwise, the IRS is going to assume that this request was triggered by the market crash, which likely erased much of the converted value. There will be many thousands of people in that boat, and this is exactly the situation where people used to recharacterize conversions routinely.
This. I haven't read all the other responses after seeing this one.

I am a tax lawyer. I have done a few PLR requests, and the filing fees alone start at $10,000 and actually go as high as $35,000, depending on the issue. Legal fees are going to be in a similar range (if not more - I once had one cross $200K in legal fees). I absolutely would never quote less than $25K to prepare a PLR request. They are long and complex, and typically the stakes are very high, so they have to be done exactly right. I have never prepared one for this issue, but I think Alan S. has gauged it correctly. It's probably not worth your time, unfortunately.

That being said, if you want to get a fee quote for this, you need to find a law firm with some tax attorneys who do these. Ask how many they have prepared. You don't want to be their guinea pig.
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Jewel
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Re: Roth Conversion / Estimated Taxes

Post by Jewel »

Hello again,

The day I’ve been dreading is here. It’s time to pay estimated taxes on this Roth conversion. This is my first time paying estimated taxes and I want to make sure I don’t make a mistake. If my understanding is correct from reading the IRS guidelines and completing the 1040ES estimated tax worksheet, I have three options. I can pay 100% of taxes due or $43,426, 90% of what is due or $39,083, or, I was shocked to read that I can pay 100% of the total tax from my 2019 return or $3,357. However, I took a TIRA $12,000 withdrawal in January before I did this Roth conversion and I had $1,200 in taxes taken out at that time. So the required annual payment to avoid a penalty would be $3,357-$1,200=$2,257? If this is correct, I am absolutely thrilled and I will either pay $2,257 on July 15 (ok to make one payment?) or make three payments, $1,129 on July 15, and $564 on Sept 15 and Jan 15, 21. (I may decide to pay more if I want to reduce the balance due.) That will leave a balance due of $39,969, which I will need to pay along with my completed tax return in 2021 without incurring any penalties Does that sound right?

Thank you in advance for your responses.
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Re: Roth Conversion / Private Letter Ruling

Post by Almost there »

My heart goes out for you, Jewel.

Wishing you all the best.
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WoodSpinner
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Re: Roth Conversion / Estimated Taxes

Post by WoodSpinner »

Jewel wrote: Sun Jul 05, 2020 12:45 pm So the required annual payment to avoid a penalty would be $3,357-$1,200=$2,257? If this is correct, I am absolutely thrilled and I will either pay $2,257 on July 15 (ok to make one payment?) or make three payments, $1,129 on July 15, and $564 on Sept 15 and Jan 15, 21. (I may decide to pay more if I want to reduce the balance due.) That will leave a balance due of $39,969, which I will need to pay along with my completed tax return in 2021 without incurring any penalties Does that sound right?

Thank you in advance for your responses.
I think your plan Is a good one but you should Doublecheck your 2019 MAGI was under $150,000. If over, you need to be at 110% of 2019 for safe harbor.

You might consider going a bit over the $2257 (e.g. $2300) since this assures you are in safe harbor Territory assuming the 019 MAGI is under $150,000. May not be strictly necessary but With taxes I am a bit of a belt and suspenders kind of guy.

WoodSpinner
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Re: Roth Conversion / Private Letter Ruling

Post by Monsterflockster »

OP, could 100k of that fall under a CARES act withdraw that you could put back?
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Re: Roth Conversion / Private Letter Ruling

Post by Alan S. »

Monsterflockster wrote: Sun Jul 05, 2020 3:11 pm OP, could 100k of that fall under a CARES act withdraw that you could put back?
No. If she qualified for a CRD, 100k of the TIRA distribution has already been repaid - to the Roth IRA as a conversion. A CRD cannot be result in a recharacterized conversion.
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Jewel
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Re: Roth Conversion / Private Letter Ruling

Post by Jewel »

Thank you. I appreciate your responses. Yes, my MAGI in 2019 is under $150k. I agree, I will pay more just in case. Probably $5,000 by July 15.
Cheers,
Jewel
the way
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Re: Roth Conversion / Estimated Taxes

Post by the way »

Jewel wrote: Sun Jul 05, 2020 12:45 pm I have three options. I can pay 100% of taxes due or $43,426, 90% of what is due or $39,083, or, I was shocked to read that I can pay 100% of the total tax from my 2019 return or $3,357. However, I took a TIRA $12,000 withdrawal in January before I did this Roth conversion and I had $1,200 in taxes taken out at that time.
Under the CARES act, can OP at least put the 12k back into the TIRA and then spread tax on 100k (or is it 88k?) over 3 years? That would remove 12k from the 32% bracket and move 67k (or maybe 59k) from 32% down to 22% (or even 12%) spread over the next 2 years.
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Re: Roth Conversion / Private Letter Ruling

Post by DSBH »

Jewel wrote: Wed Mar 18, 2020 6:00 pm ...
I did an on-line Roth conversion on 2/25 for what I thought was $2,500.00. When I checked my Vanguard account a few days later to look at the trade, I was shocked to see a transaction for almost $194,000. At first, I thought Vanguard put someone else’s money in my account. But when I saw that the portfolio value didn’t increase by that much I had a sinking feeling I did something wrong. I called Vanguard right away (the confirm says to contact them immediately if the information isn’t correct) and I was told that I traded 2500 shares, not dollars, and since the law changed in 2017 they could no longer do a re-characterization.
...
You're the third person making this mistake that I am aware of, the other 2 being myself and another VG customer - see below.

Back in March I wanted to do a Roth conversion of X dollars, and accidentally converted X shares of VG Total Bond Index from my T-IRA. I discovered the mistake the next day, basically went through what you did with VG, and after several weeks got this recommendation that you have not mentioned. My VG representative said that there was another VG customer who made a similar mistake, went to the IRS, asked for and got a "Closing Agreement" to allow VG to reverse the transaction. Without the IRS permission VG legal and compliance department would not have allowed the reversal.

I have been trying to contact the IRS local offices but have not been successful. The offices that are open offer very limited services such as:

Alien clearances (Sailing Permits)
Cash payment acceptance (Exact Change is Required)
Economic Impact Payment Issues
E-Services Authentication
Individual Taxpayer Identification Numbers and Form W-7 (More Information)
Taxpayer Protection Program

and I think I need to contact an office that offer a much longer list of services - can't find them now but there are probably 20 services or so on the longer list. I don't have much hope but will keep trying, and at the same time prepare to pre-pay for the tax in January.

Good luck!
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: Roth Conversion / Private Letter Ruling

Post by JBTX »

OP

Sorry to hear this. You are getting some excellent advice here.

Assuming this can't be reversed, there is a possibility that long term the impact, while not optimal, isn't as bad as it seems. While this put you into 32% bracket, most of the conversion likely fell in lower brackets, so perhaps you average rate for entire the conversion was 22/24%. Also, as indicated before, your future required distributions will be lower. Once you are taking social security your marginal tax rate isn't Linear, so with careful planning perhaps you can reduce your future marginal rates. Also, in 2026 rates are scheduled to move back up to 2017 levels, so if you that happens at least you made the transaction when rates are lower.

Also, I'd evaluate all other options before depleting your Roth to pay the taxes. Perhaps taking out a low rate mortgage is preferable than depleting the Roth or recognizing capital gains. Same with taking social security earlier. Make sure there aren't better options to bridge the gap.
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Re: Roth Conversion / Private Letter Ruling

Post by Alan S. »

If the closing agreement you are seeking results in a transaction reversal, basically a recharacterization, it will erase all the gains you might have.

If a bond index was converted, there is obviously not much of a gain, but a recharacterization considers the gains in your entire Roth IRA account. The S&P 500 is up about 45% since the March lows, so if you have stocks or stock indexes in the Roth IRA, you might have a sizeable overall gain, all of which would be returned to the TIRA in a recharacterization.

Suggestion being to look beyond the tax bill when contemplating if you want to pursue a closing agreement that would essentially result in recharacterization of the entire conversion.

I don't know for sure, but I doubt you would have the option of a partial reversal. Considering the circumstances, it is probably an all or nothing decision.
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Re: Roth Conversion / Private Letter Ruling

Post by DSBH »

Alan S. wrote: Sat Oct 24, 2020 2:11 pm If the closing agreement you are seeking results in a transaction reversal, basically a recharacterization, it will erase all the gains you might have.

If a bond index was converted, there is obviously not much of a gain, but a recharacterization considers the gains in your entire Roth IRA account. The S&P 500 is up about 45% since the March lows, so if you have stocks or stock indexes in the Roth IRA, you might have a sizeable overall gain, all of which would be returned to the TIRA in a recharacterization.

Suggestion being to look beyond the tax bill when contemplating if you want to pursue a closing agreement that would essentially result in recharacterization of the entire conversion.

I don't know for sure, but I doubt you would have the option of a partial reversal. Considering the circumstances, it is probably an all or nothing decision.
Yes I believe that it would be an all or nothing decision if the IRS grants a Closing Agreement to reverse the transactions, and I may also get no agreement but I’d like to at least talk to them if doable.

A few weeks after realizing the mistake I decided to exchange the whole amount from Total Bond to Total Stock because the responses from VG until then have all been all negative, so I did not get the 45% gain but more like 23% but tax free nonetheless. Not quite enough to pay for the tax but does make it a bit more tolerable - first world problem I know.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: Roth Conversion / Private Letter Ruling

Post by tibbitts »

I guess I'm not understanding something but in retrospect accidentally converting this large an amount in February might turn out to be a nearly best-possible case. I wish I'd made that mistake, since I still have to convert more this year - more than I knew I'd have to do when converting in the spring. Yes, the tax rate may be higher, but the amount you're paying tax on will be less. You may get tax breaks down the line that you would never have qualified for otherwise. It really depends on information not in the original post (other sources of income, etc.) but just on the face of it this doesn't seem it's such a bad situation. For me it would have been a huge stroke of luck, and I would have actually been willing to pay some fees to not have it undone.
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Re: Roth Conversion / Private Letter Ruling

Post by DSBH »

tibbitts wrote: Sat Oct 24, 2020 3:12 pm I guess I'm not understanding something but in retrospect accidentally converting this large an amount in February might turn out to be a nearly best-possible case. I wish I'd made that mistake, since I still have to convert more this year - more than I knew I'd have to do when converting in the spring. Yes, the tax rate may be higher, but the amount you're paying tax on will be less. You may get tax breaks down the line that you would never have qualified for otherwise. It really depends on information not in the original post (other sources of income, etc.) but just on the face of it this doesn't seem it's such a bad situation. For me it would have been a huge stroke of luck, and I would have actually been willing to pay some fees to not have it undone.
It may look better now than say in March/April/May, and I think right now it’s a good time as any to think or do something about about how to pay tax for that “mistake”. After all, what if the market drops 30% in December due to the second wave of Covid-19 and the world (economy) is shutting down again ...
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: Roth Conversion / Private Letter Ruling

Post by tibbitts »

DSBH wrote: Sat Oct 24, 2020 3:41 pm
tibbitts wrote: Sat Oct 24, 2020 3:12 pm I guess I'm not understanding something but in retrospect accidentally converting this large an amount in February might turn out to be a nearly best-possible case. I wish I'd made that mistake, since I still have to convert more this year - more than I knew I'd have to do when converting in the spring. Yes, the tax rate may be higher, but the amount you're paying tax on will be less. You may get tax breaks down the line that you would never have qualified for otherwise. It really depends on information not in the original post (other sources of income, etc.) but just on the face of it this doesn't seem it's such a bad situation. For me it would have been a huge stroke of luck, and I would have actually been willing to pay some fees to not have it undone.
It may look better now than say in March/April/May, and I think right now it’s a good time as any to think or do something about about how to pay tax for that “mistake”. After all, what if the market drops 30% in December due to the second wave of Covid-19 and the world (economy) is shutting down again ...
I'll confess that I've attempted to time my conversions to the extent that yesterday I took an amount equal to about 25% of my coming tax bill out of my taxable 500 index. True, higher capital gains taxes than if the market drops, but in this case better to have the capital gains. On the other hand I'm somewhat delaying further conversions in case there's somewhat of a pullback - I've only done less than 25% of those so far but have to do the rest by 12/31. If I had known in the spring how much I would want to convert (and how quickly the markets would partly recover) I would of course have converted much more then.
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Re: Roth Conversion / Private Letter Ruling

Post by palanzo »

Enkidu wrote: Fri Mar 20, 2020 4:38 pm Vanguard's poor user interface for Roth conversions in brokerage accounts may be the problem here. I did two Roth conversions in January, one in a brokerage account, and one in a mutual fund account. The conversion in the mutual fund account was straightforward, but the brokerage account conversion has a twist for the unwary.

I specified "sell in dollars" in my brokerage account then selected my Roth as the destination. A window pops up for the Roth conversion but the only option is to list the number of shares to convert. I thought that I made a mistake and started over with the same result. I had to look up NAV and estimate the number of shares to hit the dollar value target. There is no convert in dollars option. I could see how someone could think that the transaction was in dollars as they originally specified and just enter dollars in the share box.

This is the way traditional mutual fund accounts work, the users specifies sell or exchange in dollars once and the transaction is completed in dollars.

OP if you were using a brokerage account you may want to verify that you can start a Roth conversion in dollars but have to complete it in shares. Is this what happened to you, and you didn't catch it? You don't have to complete the transaction to verify this. Then go back to Vanguard and ask for relief because of their confusing user interface. You can't be the only person this has happened to and now there is no way to undo a conversion.
I will be doing a Roth conversion for the first time this year. Why does Vanguard have two different mechanisms for doing this depending on whether the mutual fund or brokerage account is used? Why does one sell in dollars and convert in shares? The numbers can't match up to a penny in that case. What happens if the tIRA is mutual fund platform and the Roth is brokerage? That was not my choice but forced by Vanguard.
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Re: Roth Conversion / Private Letter Ruling

Post by DSBH »

tibbitts wrote: Sat Oct 24, 2020 4:37 pm I'll confess that I've attempted to time my conversions to the extent that yesterday I took an amount equal to about 25% of my coming tax bill out of my taxable 500 index.
Well I’ll admit that a few weeks ago I took 100% of my estimated tax bill out of my taxable TSM, and furthermore reduced my long term AA from 60/40 to 50/50.
John C. Bogle: "Never confuse genius with luck and a bull market".
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