Roth IRA and Tax Withholding

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Walkitoff
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Roth IRA and Tax Withholding

Post by Walkitoff » Tue Dec 05, 2017 7:56 pm

<t>I plan on withdrawing from either a Vanguard IRA or a 401K held by Vanguard and withhold fed and state taxes on that amount this year. That withdrawal would by and large be my taxable income for the year. I have not paid estimated taxes for the year so that would cover my entire tax bill. I am over the 59 1/2 age so early withdrawal penalty is not an issue.<br/>
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As an alternative, is there a way I can roll over either the entire amount or the amount net of taxes to a Roth IRA without incurring the approximately 3% under withholding tax penalty at this point? I would prefer to roll the entire amount and have the extra cash to make up the difference.<br/>
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Any other options I'm not considering?</t>

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FiveK
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Re: Roth IRA and Tax Withholding

Post by FiveK » Tue Dec 05, 2017 8:05 pm

If essentially all your income is occurring this month, then paying your 2017 tax via estimated taxes this month (actually, by Jan. 15, 2018) will avoid under withholding penalties.

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Earl Lemongrab
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Re: Roth IRA and Tax Withholding

Post by Earl Lemongrab » Wed Dec 06, 2017 1:02 pm

Withholding is the easy way. You end up with less in the Roth unless you make up for the withheld amount from outside funds.
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livesoft
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Re: Roth IRA and Tax Withholding

Post by livesoft » Wed Dec 06, 2017 1:09 pm

One can pay taxes many different ways at [almost] any time they want to. For instance, you can pay the IRS today with their online DirectPay system directly from your checking account. It would take just a few minutes to do so.

So I would do the the rollovers and conversions without taking any taxes out. Then when I wanted to pay my taxes, I would just pay from my checking account online with IRS Direct Pay. Of course, I would make sure that I had enough money in my checking account first to cover the money transfer to the IRS.

https://www.irs.gov/payments/direct-pay

The IRS wants your money, so they make it trivial for you to give it to them. But if you have to pay more than $10,000,000 at one time, you cannot use Direct Pay.
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Epsilon Delta
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Re: Roth IRA and Tax Withholding

Post by Epsilon Delta » Wed Dec 06, 2017 1:40 pm

FiveK wrote:
Tue Dec 05, 2017 8:05 pm
If essentially all your income is occurring this month, then paying your 2017 tax via estimated taxes this month (actually, by Jan. 15, 2018) will avoid under withholding penalties.
But that will require a form 2210 and schedule AI. Depending on circumstances this may be a bit of a pain. I'd suggest the OP download them and see whats involved.

An other alternative is to have tax withheld from the Roth conversion and complete the roll over by sending a check for the withheld amount from your taxable account to the Roth withing 60 days as a "rollover contribution". Be aware that there must be at least 365 days between such indirect rollovers so you have to be careful.

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FiveK
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Re: Roth IRA and Tax Withholding

Post by FiveK » Wed Dec 06, 2017 2:11 pm

Epsilon Delta wrote:
Wed Dec 06, 2017 1:40 pm
FiveK wrote:
Tue Dec 05, 2017 8:05 pm
If essentially all your income is occurring this month, then paying your 2017 tax via estimated taxes this month (actually, by Jan. 15, 2018) will avoid under withholding penalties.
But that will require a form 2210 and schedule AI. Depending on circumstances this may be a bit of a pain.
Yes, it may be. In OP's circumstance ("...withdrawal would by and large be my taxable income for the year") it should be straightforward (especially if using tax software) but it is a consideration.

FactualFran
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Re: Roth IRA and Tax Withholding

Post by FactualFran » Wed Dec 06, 2017 2:33 pm

It should be possible to rollover the entire amount to a Roth IRA. Take the entire amount of the IRA or 401(k) as a distribution and have income tax withheld from distribution. You should receive the net amount after the income tax withholding. You can rollover the entire amount (the net amount received plus extra cash up to the amount withheld) to a Roth IRA.

The IRA or 401(k) custodian may encourage to do a trustee-to-trustee transfer or a direct rollover, with which income tax would not be withheld. However, it seems that you want income tax withheld to avoid underpayment or the complication of completing the Annualized Income Installment Method of Form 2210.

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