mechanics of paying taxes on a Roth Conversion

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cashboy
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mechanics of paying taxes on a Roth Conversion

Post by cashboy » Wed May 15, 2019 11:45 am

hi.

I will be converting $60,000 out of a large IRA at Fidelity (that years ago I had rolled my megacorp 401k into) to a new to-be-created Roth IRA at Fidelity. All contributions to the IRA had been made via 401k pre-tax (no after tax). I intend to do this yearly for the next 10 years. I understand that this conversion is viewed as income.

I have searched and found many topics on the subject related to the benefits of conversion, or where to get the money to pay for the conversion, but I am not finding anything specific to exactly how one pays for conversion and when.

my question is: once the Roth IRA conversion is completed - say June 15 - how and when do I pay taxes on it?

any specific information would be appreciated. for example, if there are forms, which ones, from where, and how to complete them.

thanks in advance

edit: i tried calling IRS. I followed menu options and got to dead ends. I called and got to operators that ultimately transferred me to the same dead ends. I finally spoke to someone in a Procedures department that said go look for it on the web site. I told them what I have been through and they just repeated themselves. :x
Last edited by cashboy on Wed May 15, 2019 1:07 pm, edited 2 times in total.

Silk McCue
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Re: mechanics of paying taxes on a Roth Conversion

Post by Silk McCue » Wed May 15, 2019 12:13 pm

You can either pay estimated quarterly tax payment by Sep 16th 2019 (if the conversion is performed after May 31) to cover the tax due, OR if you have other income sources (Pension, Job etc) you can increase the tax withholding on the remainder of the year from those sources to satisfy the full tax obligation for the year. If you do the former you will likely need to show that you paid the taxes due in a timely manner when you file your taxes via a form. If the latter then you won't have to do that and will eliminate any possibility of penalty and interest being due.

2019 Estimated Tax Payments

https://www.kiplinger.com/article/taxes ... s-due.html


Cheers

kaneohe
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Re: mechanics of paying taxes on a Roth Conversion

Post by kaneohe » Wed May 15, 2019 12:28 pm

You might also be able to use the prior yr safe harbor.......if you pay by withholding 100% of last yrs taxes (110% if AGI>150K) by end of yr.
If your income this yr is similar to last yr except for the Roth conversion, if you meet safe harbor, you could pay the taxes for the Roth converion in April next yr.

https://wallethacks.com/estimated-taxes ... bor-rules/

Topic Author
cashboy
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Re: mechanics of paying taxes on a Roth Conversion

Post by cashboy » Wed May 15, 2019 12:58 pm

kaneohe wrote:
Wed May 15, 2019 12:28 pm
You might also be able to use the prior yr safe harbor.......if you pay by withholding 100% of last yrs taxes (110% if AGI>150K) by end of yr.
If your income this yr is similar to last yr except for the Roth conversion, if you meet safe harbor, you could pay the taxes for the Roth converion in April next yr.

https://wallethacks.com/estimated-taxes ... bor-rules/
does not apply to me, but thanks

columbia
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Re: mechanics of paying taxes on a Roth Conversion

Post by columbia » Wed May 15, 2019 12:59 pm

Fidelity can’t just withhold the taxes at the time of conversion?

Topic Author
cashboy
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Re: mechanics of paying taxes on a Roth Conversion

Post by cashboy » Wed May 15, 2019 1:02 pm

Silk McCue wrote:
Wed May 15, 2019 12:13 pm
You can either pay estimated quarterly tax payment by Sep 16th 2019 (if the conversion is performed after May 31) to cover the tax due, OR if you have other income sources (Pension, Job etc) you can increase the tax withholding on the remainder of the year from those sources to satisfy the full tax obligation for the year. If you do the former you will likely need to show that you paid the taxes due in a timely manner when you file your taxes via a form. If the latter then you won't have to do that and will eliminate any possibility of penalty and interest being due.

2019 Estimated Tax Payments

https://www.kiplinger.com/article/taxes ... s-due.html


Cheers
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.

Topic Author
cashboy
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Re: mechanics of paying taxes on a Roth Conversion

Post by cashboy » Wed May 15, 2019 1:07 pm

columbia wrote:
Wed May 15, 2019 12:59 pm
Fidelity can’t just withhold the taxes at the time of conversion?
they can, but that lessens the amount being converted (in a bad way), and I want to pay out of separate funds to maintain the funds amount.

Caduceus
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Re: mechanics of paying taxes on a Roth Conversion

Post by Caduceus » Wed May 15, 2019 1:09 pm

cashboy wrote:
Wed May 15, 2019 1:02 pm
Silk McCue wrote:
Wed May 15, 2019 12:13 pm
You can either pay estimated quarterly tax payment by Sep 16th 2019 (if the conversion is performed after May 31) to cover the tax due, OR if you have other income sources (Pension, Job etc) you can increase the tax withholding on the remainder of the year from those sources to satisfy the full tax obligation for the year. If you do the former you will likely need to show that you paid the taxes due in a timely manner when you file your taxes via a form. If the latter then you won't have to do that and will eliminate any possibility of penalty and interest being due.

2019 Estimated Tax Payments

https://www.kiplinger.com/article/taxes ... s-due.html


Cheers
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.
Your Roth conversion income will appear on your 1040. As for how to determine the estimated payment, you can either put in the numbers in the tax program to get a fairly good idea of how much you need ot pay, or you can just take your marginal tax rate multiplied by the conversion income as an estimate.

SovereignInvestor
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Re: mechanics of paying taxes on a Roth Conversion

Post by SovereignInvestor » Wed May 15, 2019 1:11 pm

cashboy wrote:
Wed May 15, 2019 1:07 pm
columbia wrote:
Wed May 15, 2019 12:59 pm
Fidelity can’t just withhold the taxes at the time of conversion?
they can, but that lessens the amount being converted (in a bad way), and I want to pay out of separate funds to maintain the funds amount.
I had same issue when doing conversion for family member. Easiest way is withholding from.converted amount buy it lessens amount to ROTH. Would rather burn through taxable funds to pay taxes than precious ROTH money.

I think best is to adjust pension or paycheck withholdings. I did the estimated quarterly tax method and almost got nailed with massive penalty if it not for extra grace after tax cut act even though I sent quarterly check for taxes timed exactly with conversions. Withholding is much better option.

cherijoh
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Re: mechanics of paying taxes on a Roth Conversion

Post by cherijoh » Wed May 15, 2019 1:33 pm

columbia wrote:
Wed May 15, 2019 12:59 pm
Fidelity can’t just withhold the taxes at the time of conversion?
If you do then the withheld taxes counts as an additional distribution (resulting in even more taxes). If you are less than 59.5, you would also owe a 10% early withdrawal penalty on any funds that were distributed that did not get converted to Roth. It is best if you have an alternate source of funding to pay the taxes on a Roth conversion.

somber
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Re: mechanics of paying taxes on a Roth Conversion

Post by somber » Wed May 15, 2019 3:15 pm

SovereignInvestor wrote:
Wed May 15, 2019 1:11 pm

I think best is to adjust pension or paycheck withholdings. I did the estimated quarterly tax method and almost got nailed with massive penalty if it not for extra grace after tax cut act even though I sent quarterly check for taxes timed exactly with conversions. Withholding is much better option.
Why would you have gotten nailed if the quarterly check was timed exactly with conversions? I'm planning to do some conversions after I retire, so withholding won't be an option for me. Is there a way to avoid the pitfall you alluded to if estimated tax payments are the only option?

retiredjg
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Re: mechanics of paying taxes on a Roth Conversion

Post by retiredjg » Wed May 15, 2019 3:18 pm

cashboy wrote:
Wed May 15, 2019 1:07 pm
columbia wrote:
Wed May 15, 2019 12:59 pm
Fidelity can’t just withhold the taxes at the time of conversion?
they can, but that lessens the amount being converted (in a bad way), and I want to pay out of separate funds to maintain the funds amount.
For a person not yet 59.5, it would also cause an early withdrawal penalty.

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Re: mechanics of paying taxes on a Roth Conversion

Post by LadyGeek » Wed May 15, 2019 4:07 pm

This thread is now in the Personal Finance (Not Investing) forum (taxes).
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Lee_WSP
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Re: mechanics of paying taxes on a Roth Conversion

Post by Lee_WSP » Wed May 15, 2019 4:20 pm

You can either make an estimated payment (as has already been stated), withhold additional money from your W-2, or rely on the safe harbor rule to avoid the estimated tax penalty & pay up by April 15th.

The Wizard
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Re: mechanics of paying taxes on a Roth Conversion

Post by The Wizard » Wed May 15, 2019 4:26 pm

somber wrote:
Wed May 15, 2019 3:15 pm
SovereignInvestor wrote:
Wed May 15, 2019 1:11 pm

I think best is to adjust pension or paycheck withholdings. I did the estimated quarterly tax method and almost got nailed with massive penalty if it not for extra grace after tax cut act even though I sent quarterly check for taxes timed exactly with conversions. Withholding is much better option.
Why would you have gotten nailed if the quarterly check was timed exactly with conversions? I'm planning to do some conversions after I retire, so withholding won't be an option for me. Is there a way to avoid the pitfall you alluded to if estimated tax payments are the only option?
Yes, there's another form you file to show estimated tax payments track your uneven income over the year properly.
I think it's form 2210...
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Nicolas
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Re: mechanics of paying taxes on a Roth Conversion

Post by Nicolas » Wed May 15, 2019 4:36 pm

I just do a “what if” calculation in Turbotax and pay the full amount due for that conversion versus what I would’ve owed without the conversion in one estimated tax payment to both federal & state for the quarter that I did the conversion in. If you pay in a later quarter or at the time of tax filing you could get hit with an underwithholding penalty.
It was a new day yesterday. It’s an old day now.

lstone19
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Re: mechanics of paying taxes on a Roth Conversion

Post by lstone19 » Wed May 15, 2019 4:59 pm

cashboy wrote:
Wed May 15, 2019 1:02 pm
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.
You're making the mistake of thinking that when you make estimated payments, you have to tell the IRS what it's for. You merely make (or don't make) estimated payments. Accounting for it all is done on your 1040 and its schedules. You do not need to file anything when you make the estimated payment to tell the IRS it's for a Roth conversion.

At the end of the year, you account (if needed) for the timing of your estimated payments on form 2210,. If you need to get into the timing of when you received the income, that's done on 2210-AI (Annualized Income) which is much more complicated.

As for the amount of the estimated payment, you're largely on your own for calculating that. The IRS just want to be timely paid. How you come up with the amounts to send them is your business. If you're short, you'll pay a late payment penalty (essentially interest). Other than paying the late payment penalty, you will not be in any sort of trouble for not paying enough.

kaneohe
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Re: mechanics of paying taxes on a Roth Conversion

Post by kaneohe » Wed May 15, 2019 5:08 pm

cashboy wrote:
Wed May 15, 2019 1:02 pm
Silk McCue wrote:
Wed May 15, 2019 12:13 pm
.............................
https://www.kiplinger.com/article/taxes ... s-due.html
...............................
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.
There is no special form that you fill out for Roth conversions or any other type of income when you are paying estimated taxes. If you are mailing a check, you would use1040-ES which just documents your name/SSN/amount you are paying https://www.irs.gov/pub/irs-pdf/f1040es.pdf In that link there is a worksheet for determining your estimated tax.........but that assumes you are going to pay equal "quarterly" payments and incorporates the safe harbor rule. If you are paying a one-time special for lumpy income like your Roth conversion, do as suggested by Caduceus. You can use tax software or a tax calculator like https://www.mortgagecalculator.org/calc ... ulator.php to calculate your tax w/ and w/o the Roth conversion. The difference is due to the Roth conversion.

When filing your taxes next April, you will probably need to file Sch AI of F2210 to demonstrate that you paid in a timely manner the proper amounts of estimated tax.
I

Lee_WSP
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Re: mechanics of paying taxes on a Roth Conversion

Post by Lee_WSP » Wed May 15, 2019 6:05 pm

lstone19 wrote:
Wed May 15, 2019 4:59 pm
cashboy wrote:
Wed May 15, 2019 1:02 pm
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.
You're making the mistake of thinking that when you make estimated payments, you have to tell the IRS what it's for. You merely make (or don't make) estimated payments. Accounting for it all is done on your 1040 and its schedules. You do not need to file anything when you make the estimated payment to tell the IRS it's for a Roth conversion.

At the end of the year, you account (if needed) for the timing of your estimated payments on form 2210,. If you need to get into the timing of when you received the income, that's done on 2210-AI (Annualized Income) which is much more complicated.

As for the amount of the estimated payment, you're largely on your own for calculating that. The IRS just want to be timely paid. How you come up with the amounts to send them is your business. If you're short, you'll pay a late payment penalty (essentially interest). Other than paying the late payment penalty, you will not be in any sort of trouble for not paying enough.
What he said. The IRS doesn't care what the estimated payment is for, just that they're on time.

https://www.irs.gov/faqs/estimated-tax/ ... ividuals-2

But then there's this guideline for avoiding the late penalty or the underpayment penalty rather:
https://www.irs.gov/taxtopics/tc306

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celia
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Re: mechanics of paying taxes on a Roth Conversion

Post by celia » Thu May 16, 2019 5:02 am

cashboy wrote:
Wed May 15, 2019 1:02 pm
Thanks. I looked at that, and that shows how to make payments. But, but there is no reference to a Roth conversion, and I am wondering if there is a form that needs to be filled out for the conversion to determine the estimated payment described in the link.
There is no form for calculating taxes for a Roth conversion. The easiest way to tell what your overall tax is for the 1040 (which includes the Roth conversion) is to make a copy of the data file for your 2018 income taxes, then edit the copy using the same tax software and add the amount you plan to convert to your wages or to the Roth conversion part of the software.

Then you can change your tax withholding to have the total amount withheld from your wages or pension or (whatever) be close to the amount of this year’s estimated tax. Don’t forget to do this for the state too.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

lstone19
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Re: mechanics of paying taxes on a Roth Conversion

Post by lstone19 » Thu May 16, 2019 7:07 am

celia wrote:
Thu May 16, 2019 5:02 am
Don’t forget to do this for the state too.
If your state taxes it. Some states do not tax retirement income either in whole or in part.

hulburt1
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Re: mechanics of paying taxes on a Roth Conversion

Post by hulburt1 » Thu May 16, 2019 7:29 am

I just have my part time job handed over. I have 70% fed. 30% state. I'm 66 and have been doing a Roth conversion for 4 years. about $30000 a year.

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WoodSpinner
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Re: mechanics of paying taxes on a Roth Conversion

Post by WoodSpinner » Thu May 16, 2019 9:20 am

cashboy wrote:
Wed May 15, 2019 12:58 pm
kaneohe wrote:
Wed May 15, 2019 12:28 pm
You might also be able to use the prior yr safe harbor.......if you pay by withholding 100% of last yrs taxes (110% if AGI>150K) by end of yr.
If your income this yr is similar to last yr except for the Roth conversion, if you meet safe harbor, you could pay the taxes for the Roth converion in April next yr.

https://wallethacks.com/estimated-taxes ... bor-rules/
does not apply to me, but thanks
Curious why you think this doesn’t apply?

FWIW, the 110% Safe Harbor is my preferred strategy fo the next 10 years of Roth Conversions. Am I missing something?

WoodSpinner

TropikThunder
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Re: mechanics of paying taxes on a Roth Conversion

Post by TropikThunder » Thu May 16, 2019 12:02 pm

WoodSpinner wrote:
Thu May 16, 2019 9:20 am
cashboy wrote:
Wed May 15, 2019 12:58 pm
kaneohe wrote:
Wed May 15, 2019 12:28 pm
You might also be able to use the prior yr safe harbor.......if you pay by withholding 100% of last yrs taxes (110% if AGI>150K) by end of yr.
If your income this yr is similar to last yr except for the Roth conversion, if you meet safe harbor, you could pay the taxes for the Roth converion in April next yr.

https://wallethacks.com/estimated-taxes ... bor-rules/
does not apply to me, but thanks
Curious why you think this doesn’t apply?

FWIW, the 110% Safe Harbor is my preferred strategy fo the next 10 years of Roth Conversions. Am I missing something?

WoodSpinner
OP is probably retired and assuming “withholding” refers to taxes withheld from a paycheck.

SovereignInvestor
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Re: mechanics of paying taxes on a Roth Conversion

Post by SovereignInvestor » Thu May 16, 2019 12:49 pm

somber wrote:
Wed May 15, 2019 3:15 pm
SovereignInvestor wrote:
Wed May 15, 2019 1:11 pm

I think best is to adjust pension or paycheck withholdings. I did the estimated quarterly tax method and almost got nailed with massive penalty if it not for extra grace after tax cut act even though I sent quarterly check for taxes timed exactly with conversions. Withholding is much better option.
Why would you have gotten nailed if the quarterly check was timed exactly with conversions? I'm planning to do some conversions after I retire, so withholding won't be an option for me. Is there a way to avoid the pitfall you alluded to if estimated tax payments are the only option?
Not technically me but family member but I did the conversion for them and do their taxes so it's as if it is me.

I honestly don't know..that's what Turbotax said.

It's as if the december large conversion I did...they pro rate through the entire year and I didn't pay enough in Q1 2018....

It seems like nonsense but that seems to be what they do.

Say I owe 20K from December conversion and pay them that in december..it seemed like they were assuming I owe them 5K each quarter and I didn't pay them in initial quarters so there's interest charges.


I may have to file a form to prove timing as some say hut TT is supposed to handle that when I input dates of conversion etc.

There was no penalty but was close

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WoodSpinner
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Re: mechanics of paying taxes on a Roth Conversion

Post by WoodSpinner » Thu May 16, 2019 1:24 pm

You may need to manually complete form 2210 and indicate when the conversion took place vs when you paid your estimated taxes. That will rectify any issues.

WoodSpinner

fleetwdl
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Re: mechanics of paying taxes on a Roth Conversion

Post by fleetwdl » Thu May 16, 2019 1:33 pm

Here is how I did it in 2017 and 2018. In 2017 I did two conversions and in 2018 I did one conversion. After each conversion, I sent in the amount of marginal income tax to the IRS within a month of completing the conversion. That way I did not have to figure out by which quarter I would need to submit an estimated payment (or how much), nor did I have to figure out if I would qualify for safe harbor. I'm sure that I lost some interest on the funds which I submitted early, but I also never heard a peep from an IRS auditor. IRS did send me estimated payment forms and directions a couple times, which I promptly recycled.

On another note, I discovered after converting that the IRMMA rules would now cause me to pay extra on Medicare premiums for up to two years due to the inflated income for both of those years in which I converted. So if you are in or approaching retirement, be sure to include that in your financial calculations. I just said screw it and kept working to take advantage of a great employer health insurance plan.

Hope this helps! D

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