has anyone used the indirect rollover @Vanguard

[capran]

I have read and re-read the recent discussion about replacing the tax withheld on a tIRA to Roth Conversion by doing an "indirect rollover" into the Roth. I am a very concrete person, and would appreciate hearing from anyone who has used that process with Vanguard. We have more than enough cash to fund it in a Vanguard account, but worry if they code it wrong or whether to do it over the phone, or just on line, how and what to click to make it happen. I don't even think there is a settlement fund within our taxable account. Thoughts and input appreciated?

[Geologist]

If you have a brokerage account, you have a settlement fund. (Perhaps there is nothing in it.)

If you are still on the older mutual fund platform, then you wouldn't have a settlement fund.

[capran]

If you have a brokerage account, you have a settlement fund. (Perhaps there is nothing in it.)

If you are still on the older mutual fund platform, then you wouldn't have a settlement fund.

We do have brokerage accounts in taxable, as well as Roth and tIRA. A few years ago we transferred some taxable cash to bank but didn't remember moving it to a settlement account. Just checked, since back then we were getting paper statements and confirmations. As recently as June 2022 when we transferred money from a prime taxable account, we did a direct transfer to a bank without first moving it to a settlement fund.

so would still like to hear from anyone replacing the taxes withheld in a Roth conversion doing an indirect rollover into the Roth from a taxable Vanguard account.

[bongo]

This thread has some summaries. viewtopic.php?t=443242 See Stinky's step-by-step post for Vanguard. (oh looks like you might have already seen the thread)

[capran]

This thread has some summaries. viewtopic.php?t=443242 See Stinky's step-by-step post for Vanguard. (oh looks like you might have already seen the thread)

I saw this and printed it earlier. the pertinent part that concerns me was in the OP's question about triggering an IRS issue since he is not eligible to make a Roth Contribution.

" 5. Now, to "top up" your Roth IRA for the $25,000 of taxes withheld, go to your Roth IRA account on your "accounts" page. Click on "transact" at the right side of the screen, right below the amount in your Roth IRA. Under "transact", click "Contribute to IRA". At the very top of the next screen, it will ask you "Is this a rollover from an employer-sponsored plan or IRA?" Click the "yes" radio button, and say it's a conversion from a non-roth IRA. Then click on the mutual fund you wish to purchase, input the amount, and choose the funding source (for me it is my linked bank account). Follow the process through to the conclusion.

6. You'll see $25,000 withdrawn from your bank account, and it will appear in your Roth IRA settlement account.

So at the end of this two step process, you'll have $100,000 less in your traditional IRA, $100,000 more in your Roth IRA, $25,000 less in your checking account, and $25,000 of tax withholding that will be sent to Uncle Sam.

It's my understanding that you have 60 days to complete step 5 after steps 1-4 are done. (But I usually do step 5 within a day or two, just so I odn't forget to do it.) And you can do this as many times as you want, since the "once per year" rule for indirect rollovers doesn't apply to Roth conversions. "

the only difference I see is in the response where the person pulled the money from his bank, where-as i would be pulling it from the cash in the MMkt. I guess I need reassurance it is legal and not going to cause me a problem, and if it really is that easy with a box to check that it's a rollover. that seems like we are just gaming the system, which I guess shouldn't be a problem. That's why we have kept to doing withholding taxes, since it's considered "timely" by the IRS. That part has worked out well, by doing the large percentage of the conversion in early January, getting the whole years growth/dividends tax free in the roth, and continuing to get the tax deferred growth/dividends until December, which helps defray the taxed withheld (which if we do the indirect roll over, will mean no taxes would be paid out of the entire conversion.

edit: And DW reminded me to ask- OK, if that works, is there any IRS form to fill out that says you did an indirect rollover?

[delamer]

What am I missing?

There is an option to select “Roth conversion” from the Traditional IRA, assuming both accounts are at Vanguard. No tax is withheld.

It’s unclear as to why you’d be doing an indirect rollover.

[rkhusky]

What am I missing?

There is an option to select “Roth conversion” from the Traditional IRA, assuming both accounts are at Vanguard. No tax is withheld.

It’s unclear as to why you’d be doing an indirect rollover.

Because you want taxes withheld, rather than making estimated payments. And you want to pay the taxes from taxable, rather than from the tIRA.

There are also issues with paying taxes from the tIRA if you are under 59.5, unless you complete the indirect rollover.

People could also do a regular Roth conversion. And then do a withdrawal, with 99% withheld, followed by the indirect rollover. Accomplishes the same thing.

[Stinky]

the only difference I see is in the response where the person pulled the money from his bank, where-as i would be pulling it from the cash in the MMkt. I guess I need reassurance it is legal and not going to cause me a problem, and if it really is that easy with a box to check that it's a rollover.

I don’t see any reason why you couldn’t use you settlement fund. (In your taxable account, of course - not in your IRA).

that seems like we are just gaming the system, which I guess shouldn't be a problem.

I don’t see how having withholding done in December is “gaming the system”. It’s just following the rules.

That's why we have kept to doing withholding taxes, since it's considered "timely" by the IRS. That part has worked out well, by doing the large percentage of the conversion in early January, getting the whole years growth/dividends tax free in the roth, and continuing to get the tax deferred growth/dividends until December, which helps defray the taxed withheld (which if we do the indirect roll over, will mean no taxes would be paid out of the entire conversion.

The way I see it, I can set aside the cash needed to make the indirect rollover to the Roth IRA, and earn interest on it all year until I make the Roth conversion in December. That’s why I do this transaction in December rather than January.

edit: And DW reminded me to ask- OK, if that works, is there any IRS form to fill out that says you did an indirect rollover?

Not that I know of.

[capran]

the only difference I see is in the response where the person pulled the money from his bank, where-as i would be pulling it from the cash in the MMkt. I guess I need reassurance it is legal and not going to cause me a problem, and if it really is that easy with a box to check that it's a rollover.

I don’t see any reason why you couldn’t use you settlement fund. (In your taxable account, of course - not in your IRA).
I've just not used the settle account process within the taxable account. Maintained funds in the "admiral mmkt fund" that I have used for money to transfers.[/color]

that seems like we are just gaming the system, which I guess shouldn't be a problem.

I don’t see how having withholding done in December is “gaming the system”. It’s just following the rules.
it just seems too good to be true and certainly advantages the tax payer[/color]

That's why we have kept to doing withholding taxes, since it's considered "timely" by the IRS. That part has worked out well, by doing the large percentage of the conversion in early January, getting the whole years growth/dividends tax free in the roth, and continuing to get the tax deferred growth/dividends until December, which helps defray the taxed withheld (which if we do the indirect roll over, will mean no taxes would be paid out of the entire conversion.

The way I see it, I can set aside the cash needed to make the indirect rollover to the Roth IRA, and earn interest on it all year until I make the Roth conversion in December. That’s why I do this transaction in December rather than January.
We do the first conversion in January, then earned the dividends all year tax free on that first 105k. The second, smaller conversion occurs in December when we have an nearly exact fix on what our income was for the year. We did earn a smaller amount of dividends on the 24k that remained in the IRA which is taxable when withdrawn. Had we left the entire amount for the year in the tIRA, that would have resulted in taxes being paid on the full amount. (so, lets say we earned 5,000 in dividends on the 105k from January, and dividends on the 24k from Jan 1 to Dec 1 of 1,200, then you're only paying tax on the 1,200 earned inside the Roth.

edit: And DW reminded me to ask- OK, if that works, is there any IRS form to fill out that says you did an indirect rollover?

Not that I know of.

hopefully by clicking "rollover from an IRA" that takes care of it. Still seems too good to be true getting an advantage for the investor, but I'll take the collectives word for it.

[capran]

What am I missing?

There is an option to select “Roth conversion” from the Traditional IRA, assuming both accounts are at Vanguard. No tax is withheld.

It’s unclear as to why you’d be doing an indirect rollover.

Because you want taxes withheld, rather than making estimated payments. And you want to pay the taxes from taxable, rather than from the tIRA.

There are also issues with paying taxes from the tIRA if you are under 59.5, unless you complete the indirect rollover.

People could also do a regular Roth conversion. And then do a withdrawal, with 99% withheld, followed by the indirect rollover. Accomplishes the same thing.

Exactly. We are way over 59.5 and as I have said, we did one conversion in January with no withholding, and the upcoming much smaller one in December with just enough withheld to be in the safe harbor.(we compute the second needed conversion in December when I know how much space we can convert to still avoid IRMAA. And if I am thinking about it correctly, I am gaining quite a bit of tax advantage by doing it this way. If I skipped the early conversion and just did it in one time, I would owed deferred tax on the entire earnings/dividends. By breaking it up, the earnings/dividends on the 105k are earned tax free, since they occurred within the Roth, and the earnings/dividends on the as yet 24k conversion will be taxed when withdrawn or otherwise converted. In real numbers, I would owe tax on $6,4000 earned if I waited and did one conversion (the total earned on 129,000), versus only owing deferred tax of $1,200 earned on the 24,000 in the tIRA. Maybe I'm confused and not seeing that correctly.

[delamer]

What am I missing?

There is an option to select “Roth conversion” from the Traditional IRA, assuming both accounts are at Vanguard. No tax is withheld.

It’s unclear as to why you’d be doing an indirect rollover.

Because you want taxes withheld, rather than making estimated payments. And you want to pay the taxes from taxable, rather than from the tIRA.

There are also issues with paying taxes from the tIRA if you are under 59.5, unless you complete the indirect rollover.

People could also do a regular Roth conversion. And then do a withdrawal, with 99% withheld, followed by the indirect rollover. Accomplishes the same thing.

Thank you. I think the “replacing the tax withheld” language is what confused me.

[capran]

Because you want taxes withheld, rather than making estimated payments. And you want to pay the taxes from taxable, rather than from the tIRA.

There are also issues with paying taxes from the tIRA if you are under 59.5, unless you complete the indirect rollover.

People could also do a regular Roth conversion. And then do a withdrawal, with 99% withheld, followed by the indirect rollover. Accomplishes the same thing.

Thank you. I think the “replacing the tax withheld” language is what confused me.

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

[Silk McCue]

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

You aren’t going to find this with a Google search. The individual steps involved are perfectly legal and remain legal if done together.

You are paying these taxes via withholding. You are also performing an indirect rollover of a prior distribution via replacement of the dollars removed.

Cheers

[Stinky]

You are paying these taxes via withholding. You are also performing an indirect rollover of a prior distribution via replacement of the dollars removed.

Well said.

Short, sweet, and to the point.

[Geologist]

Thank you. I think the “replacing the tax withheld” language is what confused me.

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

I have a book on taxes written for university employees from 2005 and it describes this technique there. The description was completely matter of fact. Thus, it is not true that only Bogleheads know about this.

As Silk McCue has posted, you won't find this with a Google search. It just involves a set of legal steps that result in an outcome that some people would find desirable.

[capran]

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

You aren’t going to find this with a Google search. The individual steps involved are perfectly legal and remain legal if done together.

You are paying these taxes via withholding. You are also performing an indirect rollover of a prior distribution via replacement of the dollars removed.

Cheers

I guess I need to get over what I think of as a "distribution" and what it is in this context. In my concrete laden brain, I think of a "distribution" as something that I take possession of, that was distributed to me. And since that money went directly to the IRS, it's hard for me to see that it was my distribution. And that when I take money out of my taxable account, it is just replacing that distribution that went to the IRS. And why is this wonderful procedure not widely talked about by all these money managers that produce all these videos, like Raymond James, and Safeguard wealth management and the plethora of other agencies that proport to be in the know? I wonder if Ken Fisher knows of this technique, given that recent thread about him? LOL Thank you all for helping. I just need to go ahead and pull up my big boy panties and do it.

[delamer]

Thank you. I think the “replacing the tax withheld” language is what confused me.

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

OK - I did an indirect rollover from which 20% taxes were withheld. I replaced the withheld dollars from my taxable account when I did the deposit into the rollover IRA. So say I withdrew $100,000 and the custodian withheld $20,000 in taxes. So I received a check for $80,000, added $20,000 (cash) from my taxable account, and deposited $100,000 into the rollover IRA.

I did get a notice from the IRS regarding the rollover being taxable, but I had all the documentation and successfully argued my case.

[Silk McCue]

…

I did get a notice from the IRS regarding the rollover being taxable, but I had all the documentation and successfully argued my case.

Sounds like you didn’t document it properly on the original tax return. There should be no reason for it to be questioned otherwise.

Cheers

[capran]

I sure wish I knew what verbiage to use to search for verification of this. I have searched for "is it legal to replace the money that was withheld for taxes during a Roth Conversion by doing an indirect rollover, replacing the amount of taxes withheld from a taxable account" and changing the wording. Why is that so many places only say there are "only 2 ways to pay taxes, either by withholding or making estimated tax payments."? It seems that only Bogleheads know of this technique.

OK - I did an indirect rollover from which 20% taxes were withheld. I replaced the withheld dollars from my taxable account when I did the deposit into the rollover IRA. So say I withdrew $100,000 and the custodian withheld $20,000 in taxes. So I received a check for $80,000, added $20,000 (cash) from my taxable account, and deposited $100,000 into the rollover IRA.

I did get a notice from the IRS regarding the rollover being taxable, but I had all the documentation and successfully argued my case.

your comment verifies that I am not understanding the terms. I thought I was following along that if one did a Roth Conversion, and had tax withheld, that it was an" indirect rollover" if one followed that conversion with moving the amount that was the tax withheld into the Roth from a taxable account. I certainly have no interest in asking Vanguard to send me a check as an IRA distribution, but to do tax withholding, and then send a check for what they send me as well as the taxes that were withheld. That sounds like extra steps, which, as you found, led to some problem with the IRS.

[Geologist]

Maybe you just have some confusion on terminology. A rollover is a distribution (From the wiki: "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan." https://www.bogleheads.org/wiki/IRA_rol ... _transfers).

I had the impression that Vanguard limited the percentage of tax withheld on an indirect rollover to 99%, so you would have a check for the amount not withheld (and you don't have to have the percentage withheld at 99%). You then would deposit the total amount of the withdrawal (withheld tax and the check amount) back into the IRA within 60 days.

It sounds like delamer made a withdrawal from a traditional IRA, received (I think) a 1099-R, and then didn't account for it correctly on the tax return. This then led to a query from the IRS, which was resolved with the documentation.

What this means is that doing this process requires a series of steps, not just with Vanguard, and you have to do them all.

[capran]

Maybe you just have some confusion on terminology. A rollover is a distribution (From the wiki: "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan." https://www.bogleheads.org/wiki/IRA_rol ... _transfers).

I had the impression that Vanguard limited the percentage of tax withheld on an indirect rollover to 99%, so you would have a check for the amount not withheld (and you don't have to have the percentage withheld at 99%). You then would deposit the total amount of the withdrawal (withheld tax and the check amount) back into the IRA within 60 days.

It sounds like delamer made a withdrawal from a traditional IRA, received (I think) a 1099-R, and then didn't account for it correctly on the tax return. This then led to a query from the IRS, which was resolved with the documentation.

What this means is that doing this process requires a series of steps, not just with Vanguard, and you have to do them all.

Like I said, I thought I had it understood. Especially when someone posted a picture of the screen, with a

BUY VANGUARD FUNDS"
1. Where is the money going?
with a "click here" to 2 spots.

"This is a rollover from an employer-sponsored plan or IRA. with a circle to fill in indicating that Yes

Followed by:

This rollover is:
O From another Roth IRA
O a conversion from a non-Roth IRA (e.g.a traditional IRA) or non-Roth the circle is filled in on this line

In my simple mind, since it says "roll over" it means rollover, but that does not fit the definition
account in an employer-sponsored plan"

I give up, and will just do it all the way I always have. I'll do the conversion from tIRA to Roth, have the amount of tax withheld that I need, and just not worry about replacing the amount of tax withheld into the Roth from my taxable account. All it means is that that 19k will earn about 800 in dividends that will be taxable when pulled out, or about 200 bucks. I am clearly too incapable of understanding the process that I thought was so clearly laid out with diagrams of the actual Vanguard screen. I thought it would have been called an "indirect rollover" because taking money out of my taxable account to replace the amount that was withheld from my conversion.

[rkhusky]

I guess I need to get over what I think of as a "distribution" and what it is in this context. In my concrete laden brain, I think of a "distribution" as something that I take possession of, that was distributed to me. And since that money went directly to the IRS, it's hard for me to see that it was my distribution.

Withholding taxes is a distribution because money is leaving a tax-advantaged account and not being placed into another tax-advantaged account. If withholding taxes before age 59.5, you will be accessed a 10% penalty, unless the money is replaced before 60 days.

[delamer]

…

I did get a notice from the IRS regarding the rollover being taxable, but I had all the documentation and successfully argued my case.

Sounds like you didn’t document it properly on the original tax return. There should be no reason for it to be questioned otherwise.

Cheers

There was no documentation attached to the original return. It was filed eiectronically.

And the IRS would have no way of knowing where the withdrawn funds ended up.

[delamer]

OK - I did an indirect rollover from which 20% taxes were withheld. I replaced the withheld dollars from my taxable account when I did the deposit into the rollover IRA. So say I withdrew $100,000 and the custodian withheld $20,000 in taxes. So I received a check for $80,000, added $20,000 (cash) from my taxable account, and deposited $100,000 into the rollover IRA.

I did get a notice from the IRS regarding the rollover being taxable, but I had all the documentation and successfully argued my case.

your comment verifies that I am not understanding the terms. I thought I was following along that if one did a Roth Conversion, and had tax withheld, that it was an" indirect rollover" if one followed that conversion with moving the amount that was the tax withheld into the Roth from a taxable account. I certainly have no interest in asking Vanguard to send me a check as an IRA distribution, but to do tax withholding, and then send a check for what they send me as well as the taxes that were withheld. That sounds like extra steps, which, as you found, led to some problem with the IRS.

An indirect rollover is when you receive a check for the amount of the withdrawal from the original account, and then deposit the check into the new IRA. A direct rollover is when the check (or electronic funds transfer) goes directly from the original account to the new account, without you receiving any funds. With a direct rollover, no taxes are withheld.

[delamer]

Maybe you just have some confusion on terminology. A rollover is a distribution (From the wiki: "Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan." https://www.bogleheads.org/wiki/IRA_rol ... _transfers).

I had the impression that Vanguard limited the percentage of tax withheld on an indirect rollover to 99%, so you would have a check for the amount not withheld (and you don't have to have the percentage withheld at 99%). You then would deposit the total amount of the withdrawal (withheld tax and the check amount) back into the IRA within 60 days.

It sounds like delamer made a withdrawal from a traditional IRA, received (I think) a 1099-R, and then didn't account for it correctly on the tax return. This then led to a query from the IRS, which was resolved with the documentation.

What this means is that doing this process requires a series of steps, not just with Vanguard, and you have to do them all.

As I noted above, I filed electronically. It is possible that I made a mistake in data entry in TurboTax that caused the IRS to request documentation. It’s been a few years and I don’t remember the details.

But there was no ability to provide any documentation with my filing.

In any case, it was resolved within a couple weeks once I got the original notice.

[grok87]

your comment verifies that I am not understanding the terms. I thought I was following along that if one did a Roth Conversion, and had tax withheld, that it was an" indirect rollover" if one followed that conversion with moving the amount that was the tax withheld into the Roth from a taxable account. I certainly have no interest in asking Vanguard to send me a check as an IRA distribution, but to do tax withholding, and then send a check for what they send me as well as the taxes that were withheld. That sounds like extra steps, which, as you found, led to some problem with the IRS.

An indirect rollover is when you receive a check for the amount of the withdrawal from the original account, and then deposit the check into the new IRA. A direct rollover is when the check (or electronic funds transfer) goes directly from the original account to the new account, without you receiving any funds. With a direct rollover, no taxes are withheld.

thanks

[HomeStretch]

Using an indirect rollover to replace the taxes withheld on a Roth conversion is fine. Just be sure that the indirect rollover is done within 60 days and that it is properly designated as an indirect rollover rather than as a contribution. Also check your Forms 1099-R and 5498 when received to ensure they are correctly done.

Despite my tax return and Forms 1099-R/5498 being done correctly, I did receive an IRS letter for one indirect rollover. I had to send copies of the account statements showing the date the funds were distributed (the date of the withholding on the Roth conversion) and the date of the indirect rollover so the IRS could verify the rollover occurred within 60 days. The IRS was satisfied. So now I keep a copy of the account statement pages with the 1099-R/5498 as part of my tax return support.

[delamer]

Using an indirect rollover to replace the taxes withheld on a Roth conversion is fine. Just be sure that the indirect rollover is done within 60 days and that it is properly designated as an indirect rollover rather than as a contribution. Also check your Forms 1099-R and 5498 when received to ensure they are correctly done.

Despite my tax return and Forms 1099-R/5498 being done correctly, I did receive an IRS letter for one indirect rollover. I had to send copies of the account statements showing the date the funds were distributed (the date of the withholding on the Roth conversion) and the date of the indirect rollover so the IRS could verify the rollover occurred within 60 days. The IRS was satisfied. So now I keep a copy of the account statement pages with the 1099-R/5498 as part of my tax return support.

Thanks; sound like my experience.

I’m not sure why some posters are assuming that I made an error in my filing, although I acknowledge that is possible. As you note, keeping good documentation is key.

[Silk McCue]

Sounds like you didn’t document it properly on the original tax return. There should be no reason for it to be questioned otherwise.

Cheers

There was no documentation attached to the original return. It was filed eiectronically.

And the IRS would have no way of knowing where the withdrawn funds ended up.

“Document” means to properly fill out the tax return.

Cheers

[delamer]

There was no documentation attached to the original return. It was filed eiectronically.

And the IRS would have no way of knowing where the withdrawn funds ended up.

“Document” means to properly fill out the tax return.

Cheers

Documentation is supplemental information submitted with the return to demonstrate the accuracy of the entries. Like a W-2.

This pertains to businesses, but it’s the same idea: https://www.irs.gov/businesses/small-bu ... uld-i-keep

[HomeStretch]

… Despite my tax return and Forms 1099-R/5498 being done correctly, I did receive an IRS letter for one indirect rollover. I had to send copies of the account statements showing the date the funds were distributed (the date of the withholding on the Roth conversion) and the date of the indirect rollover so the IRS could verify the rollover occurred within 60 days. The IRS was satisfied. So now I keep a copy of the account statement pages with the 1099-R/5498 as part of my tax return support.

Thanks; sound like my experience.

I’m not sure why some posters are assuming that I made an error in my filing, although I acknowledge that is possible. As you note, keeping good documentation is key.

Likely your filing was correct. I don’t see how the IRS can verify the 60-day requirement was met with the Forms they receive so it doesn’t surprise me that they do random audits of indirect rollovers like yours and mine. The IRS receives Form 5498 and Form 1099-R, neither of which, if IIRC, include the date of the rollover contribution or the date of the non-death distribution (i.e. tax withholding). I also don’t recall those dates appearing on Form 1040.

[Silk McCue]

“Document” means to properly fill out the tax return.

Cheers

Documentation is supplemental information submitted with the return to demonstrate the accuracy of the entries. Like a W-2.

This pertains to businesses, but it’s the same idea: https://www.irs.gov/businesses/small-bu ... uld-i-keep

My original use of the word document referred to properly filling out the tax return.

Cheers

[capran]

Using an indirect rollover to replace the taxes withheld on a Roth conversion is fine. Just be sure that the indirect rollover is done within 60 days and that it is properly designated as an indirect rollover rather than as a contribution. Also check your Forms 1099-R and 5498 when received to ensure they are correctly done.

I appreciate all the replies, but your statement above, high lighted in red seems to be in conflict with delamer wrote: ↑Thu Nov 28, 2024 5:39 pm


An indirect rollover is when you receive a check for the amount of the withdrawal from the original account, and then deposit the check into the new IRA. A direct rollover is when the check (or electronic funds transfer) goes directly from the original account to the new account, without you receiving any funds. With a direct rollover, no taxes are withheld.

It doesn't seem like it is worth saving a few hundred in taxes by using this extra step replacing taxes withheld from a taxable account when these is conflicting info. Also, we do travel extensively (about six months a year) so doing something that the IRS might come back on wanting documentation that I would not have access to is problem enough. Again, I do appreciate all the efforts to educate me, but when one person says its an indirect rollover, and the next says it's not, but the Vanguard form says Check here... just too much stress.

[HomeStretch]

Using an indirect rollover to replace the taxes withheld on a Roth conversion is fine. Just be sure that the indirect rollover is done within 60 days and that it is properly designated as an indirect rollover rather than as a contribution. Also check your Forms 1099-R and 5498 when received to ensure they are correctly done.

I appreciate all the replies, but your statement above, high lighted in red seems to be in conflict with delamer wrote: ↑Thu Nov 28, 2024 5:39 pm


An indirect rollover is when you receive a check for the amount of the withdrawal from the original account, and then deposit the check into the new IRA. A direct rollover is when the check (or electronic funds transfer) goes directly from the original account to the new account, without you receiving any funds. With a direct rollover, no taxes are withheld.

It doesn't seem like it is worth saving a few hundred in taxes by using this extra step replacing taxes withheld from a taxable account when these is conflicting info. Also, we do travel extensively (about six months a year) so doing something that the IRS might come back on wanting documentation that I would not have access to is problem enough. Again, I do appreciate all the efforts to educate me, but when one person says its an indirect rollover, and the next says it's not, but the Vanguard form says Check here... just too much stress.

delamer’s comment correctly gives an example of what is most likely the most common type of indirect rollover. I don’t think delamer intended to include every type of indirect rollover, such as an indirect rollover to replace tax withholdings on a Roth conversion. So I don’t see a conflict.

Finances are personal. As you aren’t comfortable with doing such an indirect rollover, your decision not to do so is reasonable. I have read other forum threads with this type of indirect rollover question before. Also threads where OPs’ question the legitimacy of mega backdoor Roth’s. Etc.

[rkhusky]

You can also receive a check for a direct rollover if the check is made out to the receiving brokerage FBO your account.

It’s an indirect rollover if the check is made out to you, which would necessitate you cashing the check, depositing it into your bank account, and sending a check or doing an ETF to the receiving brokerage. The IRS doesn’t care what happens in the 60 days - sending the money to the IRS for taxes, going on vacation, putting a down payment on a house, buying gold coins, etc. The money just has to be back into a tax-advantaged account within 60 days.

Edit: Note that the distribution needs to go directly to the IRS to count as withholding. If you mail a check to the IRS it would be an estimated tax payment.

[jimishooch]

This is how it went for me last month,

Completed Roth conversion and had taxes withheld.

Within 60 days of conversion cut check from personal account payable to Vanguard and Roth account number in the amount of taxes withheld.

In memo line wrote Indirect 60 day Rollover and mailed to:

Vanguard
P.O. Box 982901
El Paso TX 79998

No other documentation was needed. In about a week the funds showed up in my Roth account with a 7 day hold but I was able to trade.

Good luck

[classicjazzfan]

the only difference I see is in the response where the person pulled the money from his bank, where-as i would be pulling it from the cash in the MMkt. I guess I need reassurance it is legal and not going to cause me a problem, and if it really is that easy with a box to check that it's a rollover.

I don’t see any reason why you couldn’t use you settlement fund. (In your taxable account, of course - not in your IRA).

Like Stinky, I should think it possible in “backfilling” the Roth IRA to draw the needed money directly from my taxable-account settlement fund. However, when I tried doing that in a “test run” on the Vanguard site I was prevented from reaching the “submit” button, for the site seemed to think I was attempting a “contribution” rather than a “conversion” (noting that I’ve already reached my annual “contribution” limit.) But when I selected my linked bank account from the drop-down menu in the “where’s the money coming from?” box, I could reach the “submit” button.

In short, unless I’m doing something wrong, it appears that “backfilling” at Vanguard must be done via one’s linked bank account rather than via one’s taxable-account settlement fund. It’s a convoluted process to have to move money from my taxable-account settlement fund to my linked bank account, and then later send that same money from my linked bank account to my Roth IRA instead of simply taking the money directly from my taxable-account settlement fund in the first place without having to go through my linked bank account. But whatever works.

[Stinky]

I don’t see any reason why you couldn’t use you settlement fund. (In your taxable account, of course - not in your IRA).

Like Stinky, I should think it possible in “backfilling” the Roth IRA to draw the needed money directly from my taxable-account settlement fund. However, when I tried doing that in a “test run” on the Vanguard site I was prevented from reaching the “submit” button, for the site seemed to think I was attempting a “contribution” rather than a “conversion” (noting that I’ve already reached my annual “contribution” limit.) But when I selected my linked bank account from the drop-down menu in the “where’s the money coming from?” box, I could reach the “submit” button.

In short, unless I’m doing something wrong, it appears that “backfilling” at Vanguard must be done via one’s linked bank account rather than via one’s taxable-account settlement fund. It’s a convoluted process to have to move money from my taxable-account settlement fund to my linked bank account, and then later send that same money from my linked bank account to my Roth IRA instead of simply taking the money directly from my taxable-account settlement fund in the first place without having to go through my linked bank account. But whatever works.

Good catch!

I just went through the same exercise that you did. And I concur that I can't use my taxable account settlement fund to "backfill" the Roth IRA.

Like you, I need to fund this transaction from my linked bank account.

I agree that it's a convoluted process for you to move money from your Vanguard taxable settlement fund, to linked bank account, and then back to your Vanguard Roth account. For me, it's even more convoluted, since my "money market" fund is VUSXX, the Vanguard Treasury Money Market fund (I do this in order to save on state taxes). And you can't move money directly from a Vanguard mutual fund to your linked bank account - it needs to go through the settlement fund first.

So what I'll need to do is (1) sell VUSXX and deposit proceeds in settlement fund, (2) transfer from Vanguard settlement fund to my linked bank account, (3) transfer from my linked bank account to Vanguard Roth settlement fund or whatever mutual fund or ETF I want. (Edited to note that step 3 is not limited to Roth settlement fund. settlement fund, and then (4) purchase the appropriate investments in the Vanguard Roth account. Each of these steps takes one day, so it will be several days a full week from the time that I start until I complete this process.

Again, good catch!

[MoneyIsTime]

...it appears that “backfilling” at Vanguard must be done via one’s linked bank account rather than via one’s taxable-account settlement fund.

Good catch!

I just went through the same exercise that you did. And I concur that I can't use my taxable account settlement fund to "backfill" the Roth IRA.

Like you, I need to fund this transaction from my linked bank account.

Thanks for the added details! Agreed, I tried a test also and same result. Luckily my first attempt was successful since I had a previously used linked bank account.

[rkhusky]

So what I'll need to do is (1) sell VUSXX and deposit proceeds in settlement fund, (2) transfer from Vanguard settlement fund to my linked bank account, (3) transfer from my linked bank account to Vanguard Roth settlement fund, and then (4) purchase the appropriate investments in the Vanguard Roth account. Each of these steps takes one day, so it will be a full week from the time that I start until I complete this process.

Again, good catch!

You can move money directly from VUSXX to your bank (or from any other mutual fund).

You can also move directly from bank to mutual fund in Roth. But not 100% sure if that also holds when specifying that it is an indirect rollover.

Just checked and you can move from bank to IRA directly into a mutual fund, while labeling it an indirect rollover.

[classicjazzfan]

I agree that it's a convoluted process for you to move money from your Vanguard taxable settlement fund, to linked bank account, and then back to your Vanguard Roth account. For me, it's even more convoluted, since my "money market" fund is VUSXX. . . And you can't move money directly from a Vanguard mutual fund to your linked bank account - it needs to go through the settlement fund first.

So what I'll need to do is (1) sell VUSXX and deposit proceeds in settlement fund, (2) transfer from Vanguard settlement fund to my linked bank account, (3) transfer from my linked bank account to Vanguard Roth settlement fund, and then (4) purchase the appropriate investments in the Vanguard Roth account. Each of these steps takes one day, so it will be a full week from the time that I start until I complete this process.

Stinky:

Are you sure you can't move VUSSX money in your taxable account directly to your linked bank account without first going through the taxable account's settlement fund (VMFXX)? I too use VUSSX in my taxable account (for the same reason you do) and I frequently do "non-stop round trips" between VUSXX and my linked bank account (i.e., no "station stops" at VMFXX). By the same token, my "test run" Roth conversion indicated that I'd be able to move the "backfill" money in my linked bank account directly to my fund of choice in my Roth IRA without first stopping off at VMFXX.

[Stinky]

Stinky:

Are you sure you can't move VUSSX money in your taxable account directly to your linked bank account without first going through the taxable account's settlement fund (VMFXX)? I too use VUSSX in my taxable account (for the same reason you do) and I frequently do "non-stop round trips" between VUSXX and my linked bank account (i.e., no "station stops" at VMFXX). By the same token, my "test run" Roth conversion indicated that I'd be able to move the "backfill" money in my linked bank account directly to my fund of choice in my Roth IRA without first stopping off at VMFXX.

Oops! You’re right.

My fingers got ahead of my brain.

I (at least partially) edited my post above.

So sorry.

[capran]

well, I must admit, I choked and couldn't even do the conversion process on my own. Guess we'll need to call and do it over the phone. My screen did not look the same as what others have posted, but I continued on. got to a review and submit page, but am concerned it doesn't look like the docu page that the agent used to prepare. there was a place to put in the percentage of tax withheld, but honestly I am very afraid clicking submit will pull the full amount of the conversion and then in addition to that, pull the taxes, so instead of 24k total conversion including taxes paid, it could pull 43k. sigh. this computer age has not been helpful.

[rkhusky]

You could always do it in steps. First do a clean Roth conversion with no taxes withheld. Then do a tIRA withdrawal with 99% taxes withheld. Then do a tIRA contribution for the full amount of the prior tIRA withdrawal, indicating it is not a contribution but coming from an IRA, ie indirect rollover. This would be limited to once per year. You would pay taxes on the initial Roth conversion, but not the tIRA withdrawal.

Alternatively, you could do a Roth conversion with no taxes withheld. Then do a tIRA withdrawal with 99% taxes withheld. Then do a Roth contribution for the full amount of the prior tIRA withdrawal, indicating it is not a contribution but coming from an IRA. This may allow you to do more then one of these per year. You would pay taxes on both the initial Roth conversion and the tIRA withdrawal.

[Fractalleaf]

**deleted post with incorrect information **

[rkhusky]

I guess I need to get over what I think of as a "distribution" and what it is in this context. In my concrete laden brain, I think of a "distribution" as something that I take possession of, that was distributed to me. And since that money went directly to the IRS, it's hard for me to see that it was my distribution. And that when I take money out of my taxable account, it is just replacing that distribution that went to the IRS. And why is this wonderful procedure not widely talked about by all these money managers that produce all these videos, like Raymond James, and Safeguard wealth management and the plethora of other agencies that proport to be in the know? I wonder if Ken Fisher knows of this technique, given that recent thread about him? LOL Thank you all for helping. I just need to go ahead and pull up my big boy panties and do it.

I have actually lost sleep trying to fully understand this process, but something about your wording here has helped me understand it. Can someone confirm whether the bolded statements are correct?

1.Rollover $100,000 from tIRA to Roth and have $25,000 withheld for federal taxes
The $25,000 is technically a distribution from your Roth account. In the eyes of the IRS the $100,000 was rolled from the tIRA to the Roth and then $25,000 was ‘distributed’ to the IRS

2. The IRS allows taxpayers to replace an IRA withdrawal within 60 days. This permission was introduced to allow people to avoid fines if they mistakenly took a withdrawal before they were eligible, or mistakenly took a withdrawal for other reasons.
Since the $25,000 paid to the IRS is technically a withdrawal from the Roth IRA, you are permitted to replace that amount from your bank account.

The process takes advantage of rules that were put into place for other reasons, which is why it’s not intuitively obvious (at least to me).

Actually, I think the $25K would be considered a distribution from the tIRA, with a $75K Roth conversion.The second step would be an indirect rollover from tIRA to Roth.

[Fractalleaf]

I have actually lost sleep trying to fully understand this process, but something about your wording here has helped me understand it. Can someone confirm whether the bolded statements are correct?

1.Rollover $100,000 from tIRA to Roth and have $25,000 withheld for federal taxes
The $25,000 is technically a distribution from your Roth account. In the eyes of the IRS the $100,000 was rolled from the tIRA to the Roth and then $25,000 was ‘distributed’ to the IRS

2. The IRS allows taxpayers to replace an IRA withdrawal within 60 days. This permission was introduced to allow people to avoid fines if they mistakenly took a withdrawal before they were eligible, or mistakenly took a withdrawal for other reasons.
Since the $25,000 paid to the IRS is technically a withdrawal from the Roth IRA, you are permitted to replace that amount from your bank account.

The process takes advantage of rules that were put into place for other reasons, which is why it’s not intuitively obvious (at least to me).

Actually, I think the $25K would be considered a distribution from the tIRA, with a $75K Roth conversion.The second step would be an indirect rollover from tIRA to Roth.

But wouldn’t additional taxes be owed on the second ($25,000) indirect rollover from tIRA to Roth?

[rkhusky]

Actually, I think the $25K would be considered a distribution from the tIRA, with a $75K Roth conversion.The second step would be an indirect rollover from tIRA to Roth.

But wouldn’t additional taxes be owed on the second ($25,000) indirect rollover from tIRA to Roth?

Depends on how you do it. If you put the $25K back into the tIRA, taxes would be due on $75K. If you put the $25K into the Roth, taxes would be due on $100K.

[Fractalleaf]

But wouldn’t additional taxes be owed on the second ($25,000) indirect rollover from tIRA to Roth?

Depends on how you do it. If you put the $25K back into the tIRA, taxes would be due on $75K. If you put the $25K into the Roth, taxes would be due on $100K.

Okay thank you, I’ll correct my post..

[Fractalleaf]

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