Results of my modeling out Roth conversions

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cas
Posts: 1346
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

privateID wrote: Wed Jun 09, 2021 6:37 am That sounds pretty clear - I just need to withhold $11K (110% of last year's taxes) this year to avoid any penalty. So even though I will owe much more, total of $30K, there will be no penalty if I withhold $11K. Do I have that right? Any gotchas on that?
Yes.

Potential Gotchas:

1. Watch out for *next* year (2022), when the "110% of 2021 taxes" safe harbor will be unusually high. Sounds like you have enough certainty and spreadsheets that you could aim for the "90% of 2022" taxes, though.

2. When the IRS says "110% via withholding" they literally mean via *withholding* (from your paycheck in your case). They don't mean via estimated taxes paid via IRS Direct Pay, EFTPS, mailing a check to the IRS, etc.

(The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
Topic Author
privateID
Posts: 270
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

cas wrote: Wed Jun 09, 2021 6:57 am
privateID wrote: Wed Jun 09, 2021 6:37 am That sounds pretty clear - I just need to withhold $11K (110% of last year's taxes) this year to avoid any penalty. So even though I will owe much more, total of $30K, there will be no penalty if I withhold $11K. Do I have that right? Any gotchas on that?
Yes.

Potential Gotchas:

1. Watch out for *next* year (2022), when the "110% of 2021 taxes" safe harbor will be unusually high. Sounds like you have enough certainty and spreadsheets that you could aim for the "90% of 2022" taxes, though.

2. When the IRS says "110% via withholding" they literally mean via *withholding* (from your paycheck in your case). They don't mean via estimated taxes paid via IRS Direct Pay, EFTPS, mailing a check to the IRS, etc.

(The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
Thank you and interesting point on withholding vs estimated payments. I have always changed my tax payments via withholding. I actually find it easier to fill out a new W4 online with my employer where I can tell my employer to withhold extra money. Sounds like if I need to withhold more and I realize it later in the year, it is better to just do it via the W4 change where it is treated as a yearly amount and not broken into quarters where you have to make at least a certain amount each quarter.
VanGar+Goyle
Posts: 19
Joined: Sat May 29, 2021 1:31 pm

Re: Results of my modeling out Roth conversions

Post by VanGar+Goyle »

This has been an occasionally entertaining 200 reply conversation, though at times like
watching a boxer jabbing and a kickboxer kicking, while the rules change,
watching CNN and Fox News at the same time, or
watching people argue about what an elephant is, trunk or tail or teats ...

Can we mostly agree that paying less in taxes is a good measure,
but having more to spend over your extended lifetime is better?

If you don't need to spend your RMDs, but invest it, then you could net more eventually
if you had Roth converted it in a previous year at the same marginal tax bracket.
So converting in 24% bracket may pay off in a few years vs RMD at 22%, or at 15% in more years.
Wannaretireearly
Posts: 1519
Joined: Wed Mar 31, 2010 4:39 pm

Re: Results of my modeling out Roth conversions

Post by Wannaretireearly »

How about RMD rules (likely?) to change over the years. E.g. pushing the age RMDs start from 72 to 75 or higher?
This time next year, we'll be millionaires!
smitcat
Posts: 7887
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

VanGar+Goyle wrote: Wed Jun 09, 2021 8:49 am This has been an occasionally entertaining 200 reply conversation, though at times like
watching a boxer jabbing and a kickboxer kicking, while the rules change,
watching CNN and Fox News at the same time, or
watching people argue about what an elephant is, trunk or tail or teats ...

Can we mostly agree that paying less in taxes is a good measure,
but having more to spend over your extended lifetime is better?

If you don't need to spend your RMDs, but invest it, then you could net more eventually
if you had Roth converted it in a previous year at the same marginal tax bracket.
So converting in 24% bracket may pay off in a few years vs RMD at 22%, or at 15% in more years.
"Can we mostly agree that paying less in taxes is a good measure,
but having more to spend over your extended lifetime is better?"
Yes - exactly.

"So converting in 24% bracket may pay off in a few years vs RMD at 22%, or at 15% in more years."
No, not this.
smitcat
Posts: 7887
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

Wannaretireearly wrote: Wed Jun 09, 2021 8:55 am How about RMD rules (likely?) to change over the years. E.g. pushing the age RMDs start from 72 to 75 or higher?
You can model any unknown factors in the calculators and get a decent result to follow.
Only you can decide what potential significant future factors are prudent to model:
- portfolio performance
- age of demise of each spouse
- SS amounts and election age
- possible value of Roth conversions
- inflation rates
- tax rate(s) of heirs

If you want you can easily add to that:
- potential RMD rules changes
- potential changes to tax rates not yet under law
- potential changes to SS not yet under law

We find the initial set of variables to be suitably challenging such that we do not venture into varying the others - but you can do any variables that you would like.YMMV
KlangFool
Posts: 20874
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

smitcat wrote: Wed Jun 09, 2021 9:21 am
Wannaretireearly wrote: Wed Jun 09, 2021 8:55 am How about RMD rules (likely?) to change over the years. E.g. pushing the age RMDs start from 72 to 75 or higher?
You can model any unknown factors in the calculators and get a decent result to follow.
Only you can decide what potential significant future factors are prudent to model:
- portfolio performance
- age of demise of each spouse
- SS amounts and election age
- possible value of Roth conversions
- inflation rates
- tax rate(s) of heirs

If you want you can easily add to that:
- potential RMD rules changes
- potential changes to tax rates not yet under law
- potential changes to SS not yet under law

We find the initial set of variables to be suitably challenging such that we do not venture into varying the others - but you can do any variables that you would like.YMMV
smitcat,

IMHO, balance is the key. Over-optimization means that if one of the variables changes, the impact would be very significant.

In my case, with about 900K in the tax-deferred account, the goal is to Roth convert up to 12%/0% LTCG tax rate this year and 2022 since there is no ACA cliff. With ACA, Roth convert up close to ACA cliff every year.

It may not be the most optimum answer. But, I am fine in paying 12% taxes for this year and next.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
smitcat
Posts: 7887
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

KlangFool wrote: Wed Jun 09, 2021 9:56 am
smitcat wrote: Wed Jun 09, 2021 9:21 am
Wannaretireearly wrote: Wed Jun 09, 2021 8:55 am How about RMD rules (likely?) to change over the years. E.g. pushing the age RMDs start from 72 to 75 or higher?
You can model any unknown factors in the calculators and get a decent result to follow.
Only you can decide what potential significant future factors are prudent to model:
- portfolio performance
- age of demise of each spouse
- SS amounts and election age
- possible value of Roth conversions
- inflation rates
- tax rate(s) of heirs

If you want you can easily add to that:
- potential RMD rules changes
- potential changes to tax rates not yet under law
- potential changes to SS not yet under law

We find the initial set of variables to be suitably challenging such that we do not venture into varying the others - but you can do any variables that you would like.YMMV
smitcat,

IMHO, balance is the key. Over-optimization means that if one of the variables changes, the impact would be very significant.

In my case, with about 900K in the tax-deferred account, the goal is to Roth convert up to 12%/0% LTCG tax rate this year and 2022 since there is no ACA cliff. With ACA, Roth convert up close to ACA cliff every year.

It may not be the most optimum answer. But, I am fine in paying 12% taxes for this year and next.

KlangFool
"IMHO, balance is the key. Over-optimization means that if one of the variables changes, the impact would be very significant."
It is not that hard to run the pontential variables seprately and in concert with each other and form a chart for the possibilities.
We then know the significance of each potential variable in our case.
Running any/all variables that we see as reasonably possible thru a number of well designed calculators is a great advantage for review.

"It may not be the most optimum answer. But, I am fine in paying 12% taxes for this year and next."
We have no experience trying to stay within the ACA and/or within the 12% bracket and therefore cannot add any value to the strategy.

"In my case, with about 900K in the tax-deferred account, the goal is to Roth convert up to 12%/0% LTCG tax rate this year and 2022 since there is no ACA cliff."
For someone else to try and add any value to your strategy they would need a bunch more than this, they would also at least need: AA across all accounts, after tax balances, age of each spouse, projected portfolio performance, projected inflation, SS amounts and election years, any pensions or other fixed incomes, goals for yearly draw, goals and tax rates for heirs, projected age of demise of each spouse, etc
rab
Posts: 27
Joined: Tue Sep 18, 2012 7:20 pm

Re: Results of my modeling out Roth conversions

Post by rab »

privateID wrote: Wed Jun 09, 2021 7:19 am
cas wrote: Wed Jun 09, 2021 6:57 am
privateID wrote: Wed Jun 09, 2021 6:37 am That sounds pretty clear - I just need to withhold $11K (110% of last year's taxes) this year to avoid any penalty. So even though I will owe much more, total of $30K, there will be no penalty if I withhold $11K. Do I have that right? Any gotchas on that?
Yes.

Potential Gotchas:

1. Watch out for *next* year (2022), when the "110% of 2021 taxes" safe harbor will be unusually high. Sounds like you have enough certainty and spreadsheets that you could aim for the "90% of 2022" taxes, though.

2. When the IRS says "110% via withholding" they literally mean via *withholding* (from your paycheck in your case). They don't mean via estimated taxes paid via IRS Direct Pay, EFTPS, mailing a check to the IRS, etc.

(The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
Thank you and interesting point on withholding vs estimated payments. I have always changed my tax payments via withholding. I actually find it easier to fill out a new W4 online with my employer where I can tell my employer to withhold extra money. Sounds like if I need to withhold more and I realize it later in the year, it is better to just do it via the W4 change where it is treated as a yearly amount and not broken into quarters where you have to make at least a certain amount each quarter.
I don't mean to derail this thread, so if it's better to start a new one, then please let me know.

We retired in late 2020 and want to withdraw/convert from our Traditional IRA up to the top of the 22% bracket (same as the OP). We will have about $40K of other income, so we will be withdrawing/converting about $155K (but have not done anything yet), and in reading this thread I am now concerned about the mechanics of paying the federal income taxes on this. I had (naively?) though that we could pay the taxes through IRS Direct Pay in the quarter(s) in which we did the withdrawal(s) and/or conversion(s). But were we supposed to have been making quarterly payments throughout the year?

We have a tax accountant, so I realize that I probably need to contact them, but I wanted to get a basic idea before doing so. Thanks in advance.
cas
Posts: 1346
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

rab wrote: Wed Jun 09, 2021 12:32 pm
privateID wrote: Wed Jun 09, 2021 7:19 am
cas wrote: Wed Jun 09, 2021 6:57 am (The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
We retired in late 2020 and want to withdraw/convert from our Traditional IRA up to the top of the 22% bracket (same as the OP). We will have about $40K of other income, so we will be withdrawing/converting about $155K (but have not done anything yet), and in reading this thread I am now concerned about the mechanics of paying the federal income taxes on this. I had (naively?) though that we could pay the taxes through IRS Direct Pay in the quarter(s) in which we did the withdrawal(s) and/or conversion(s). But were we supposed to have been making quarterly payments throughout the year?
Did you take a look at the Boglehead's thread reached via the "many paths" link I mentioned above? That is a thread about a situation where someone (erroneously) thought they could avoid underpayment penalty (without filling out Schedule AI) by making a 4th quarter estimated tax payment to cover a 4th quarter bonus. (So ... not your exact situation of a Roth conversion, but a similar concept of a later-in-year burst of ordinary income.)

I'll just direct you over to that thread rather than derailing this thread.
KlangFool
Posts: 20874
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

cas wrote: Wed Jun 09, 2021 2:09 pm
rab wrote: Wed Jun 09, 2021 12:32 pm
privateID wrote: Wed Jun 09, 2021 7:19 am
cas wrote: Wed Jun 09, 2021 6:57 am (The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
We retired in late 2020 and want to withdraw/convert from our Traditional IRA up to the top of the 22% bracket (same as the OP). We will have about $40K of other income, so we will be withdrawing/converting about $155K (but have not done anything yet), and in reading this thread I am now concerned about the mechanics of paying the federal income taxes on this. I had (naively?) though that we could pay the taxes through IRS Direct Pay in the quarter(s) in which we did the withdrawal(s) and/or conversion(s). But were we supposed to have been making quarterly payments throughout the year?
Did you take a look at the Boglehead's thread reached via the "many paths" link I mentioned above? That is a thread about a situation where someone (erroneously) thought they could avoid underpayment penalty (without filling out Schedule AI) by making a 4th quarter estimated tax payment to cover a 4th quarter bonus. (So ... not your exact situation of a Roth conversion, but a similar concept of a later-in-year burst of ordinary income.)

I'll just direct you over to that thread rather than derailing this thread.
cas,

Just want to say a big "Thank you" for the redirection to that "many paths" link. It is very helpful to me.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
rab
Posts: 27
Joined: Tue Sep 18, 2012 7:20 pm

Re: Results of my modeling out Roth conversions

Post by rab »

cas wrote: Wed Jun 09, 2021 2:09 pm
rab wrote: Wed Jun 09, 2021 12:32 pm
privateID wrote: Wed Jun 09, 2021 7:19 am
cas wrote: Wed Jun 09, 2021 6:57 am (The IRS provides many paths to avoid underpayment penalty, and some of them do involve paying 110% previous-year via estimated taxes. But the first quarter deadline for estimated taxes was April 15, and the 2nd quarter deadline is June 15 (next week), so all those paths currently have complications of one level or another.)
We retired in late 2020 and want to withdraw/convert from our Traditional IRA up to the top of the 22% bracket (same as the OP). We will have about $40K of other income, so we will be withdrawing/converting about $155K (but have not done anything yet), and in reading this thread I am now concerned about the mechanics of paying the federal income taxes on this. I had (naively?) though that we could pay the taxes through IRS Direct Pay in the quarter(s) in which we did the withdrawal(s) and/or conversion(s). But were we supposed to have been making quarterly payments throughout the year?
Did you take a look at the Boglehead's thread reached via the "many paths" link I mentioned above? That is a thread about a situation where someone (erroneously) thought they could avoid underpayment penalty (without filling out Schedule AI) by making a 4th quarter estimated tax payment to cover a 4th quarter bonus. (So ... not your exact situation of a Roth conversion, but a similar concept of a later-in-year burst of ordinary income.)

I'll just direct you over to that thread rather than derailing this thread.
Thanks for the link. I will contact my tax accountant before doing any withdrawals or conversions. It looks like I have a Form 2210 with Schedule AI in my future.
cas
Posts: 1346
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

rab wrote: Wed Jun 09, 2021 2:56 pm Thanks for the link. I will contact my tax accountant before doing any withdrawals or conversions. It looks like I have a Form 2210 with Schedule AI in my future.
One thing that thread didn't get into: It is still early in the year, and you have missed only the 1st quarter estimated tax deadline so far.

So, you are only about 60 days late on 25% of your 2021 safe harbor amount. I think annual interest(penalty) for underpayment of estimated taxes is something like 3%, pro-rated for the actual number of days you are late?

Doing some very quick calculations (which could easily be wrong), I think your underpayment penalty might be less than $50 if you paid your 1st and 2nd quarter estimated taxes by June 15 (2nd quarter estimated tax due date), then met the deadlines for the 3rd and 4th quarter estimated tax payments. (You would definitely want to verify whether that less-than-$50 estimate is correct.)

If true, you could just decide to pay the less-than-$50 penalty (on your April 2022 tax return), take the quarterly payment route the rest of the year, and avoid Schedule AI.

Or you might have a case where Schedule AI is simple, and you would rather deal with Schedule AI (and any extra accountant fees) and avoid the penalty.

(Apologies for the diversion from OP's topic.)
Topic Author
privateID
Posts: 270
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

No need to apologize for taking a short detour in this thread. In fact, I am actually interested in this topic. I manage a retired relative's money. In her case, we just withhold a large amount from her RMD that we take in December for any taxes I think will be due. That has worked so far, but probably won't work after a while when RMDs start going down (she is 86). For myself, I just look at things around midyear and then do extra withholding from my paycheck the second half of the year. This year, planning to convert to the top of the 22%, caused me to think of the penalty. But when I stop working, that won't work any more. So, this topic is relevant to me.
hawkfan55
Posts: 352
Joined: Thu Apr 03, 2014 9:04 pm

Re: Results of my modeling out Roth conversions

Post by hawkfan55 »

But were we supposed to have been making quarterly payments throughout the year?
We at retired and doing Roth Conversions up to the MFJ IRMAA cliff of around $172k so we are converting in the 22% marginal tax bracket. We do not have after tax savings in our retirement portfolio, only tax deferred IRA/403b and Roth IRAs. We have pensions and DWs SS of approximately $72k. We are taking distributions from tax deferred of around 100k. In addition to spending some of the distribution and completing IRA to Roth IRA Conversions of $40-50k, we pay our Federal Taxes by doing a separate distribution in mid-December of each year and direct Vanguard to send 100% of the distribution to the IRS as Federal Tax Withholding. This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. We make sure to meet the IRS Safe Harbor rule
Edit: This only works for people over 59 1/2 as those withdrawing from tax deferred accounts who are under 59 1/2 would have to pay a 10% early withdrawal penalty.
Last edited by hawkfan55 on Wed Jun 09, 2021 7:36 pm, edited 1 time in total.
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Fly Guy
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Re: Results of my modeling out Roth conversions

Post by Fly Guy »

smitcat wrote: Wed Jun 09, 2021 10:26 am
It is not that hard to run the pontential variables seprately and in concert with each other and form a chart for the possibilities.
We then know the significance of each potential variable in our case.
Running any/all variables that we see as reasonably possible thru a number of well designed calculators is a great advantage for review.
smitcat - Interesting thought about charting the results for all variables. What type of chart are you thinking? Using i-ORP for example, run an XY scatter graph with disposable income as one axis. What would you use for the other axis? Or for the second axis would you just use the variable that you are changing - so one chart showing disposable income and Roth conversion options, one chart showing disposable income and AA, one chart showing disposable income and age for SS, etc.? Apologies if this has been detailed before - I'm pretty new here - been soaking this forum up for the past couple of months. Thanks!
cas
Posts: 1346
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

hawkfan55 wrote: Wed Jun 09, 2021 6:49 pm
But were we supposed to have been making quarterly payments throughout the year?
We at retired and doing Roth Conversions up to the MFJ IRMAA cliff of around $172k so we are converting in the 22% marginal tax bracket. We do not have after tax savings in our retirement portfolio, only tax deferred IRA/403b and Roth IRAs. We have pensions and DWs SS of approximately $72k. We are taking distributions from tax deferred of around 100k. In addition to spending some of the distribution and completing IRA to Roth IRA Conversions of $40-50k, we pay our Federal Taxes by doing a separate distribution in mid-December of each year and direct Vanguard to send 100% of the distribution to the IRS as Federal Tax Withholding. This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. We make sure to meet the IRS Safe Harbor rule.
This approach works for people who are older than 59 1/2.

Anyone who is less than 59 1/2 would incur a 10% early withdrawal penalty on an amount withheld from tIRA (or trad 403(b)/401(k)).

(Some of the people discussing this topic are less than 59 1/2; some aren't.)
hawkfan55
Posts: 352
Joined: Thu Apr 03, 2014 9:04 pm

Re: Results of my modeling out Roth conversions

Post by hawkfan55 »

hawkfan55 wrote: ↑Wed Jun 09, 2021 6:49 pm
But were we supposed to have been making quarterly payments throughout the year?
We at retired and doing Roth Conversions up to the MFJ IRMAA cliff of around $172k so we are converting in the 22% marginal tax bracket. We do not have after tax savings in our retirement portfolio, only tax deferred IRA/403b and Roth IRAs. We have pensions and DWs SS of approximately $72k. We are taking distributions from tax deferred of around 100k. In addition to spending some of the distribution and completing IRA to Roth IRA Conversions of $40-50k, we pay our Federal Taxes by doing a separate distribution in mid-December of each year and direct Vanguard to send 100% of the distribution to the IRS as Federal Tax Withholding. This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. We make sure to meet the IRS Safe Harbor rule.
This approach works for people who are older than 59 1/2.

Anyone who is less than 59 1/2 would incur a 10% early withdrawal penalty on an amount withheld from tIRA (or trad 403(b)/401(k)).

(Some of the people discussing this topic are less than 59 1/2; some aren't.)
.
You are correct. I will edit my earlier post.
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Lee_WSP
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Location: Arizona

Re: Results of my modeling out Roth conversions

Post by Lee_WSP »

privateID wrote: Mon Jun 07, 2021 2:37 pm Klang has asked me a number of times how I was going to pay for taxes on conversions. I do believe this is a topic I need to explore further. I believe I can handle modest conversions (or similar) out of current cash flow. I recently switched to do all 401K Roth contributions and after-tax 401K contributions immediately converted to 401K Roth. That was balanced somewhat by changing my wife's IRA contribution to a traditional IRA (for NY state taxation purposes). The rest, at least for this year, I can handle from current cash flow. However, if I want to do additional conversions this year, I would be past the limit of what I can handle from current cash flow. So, the question becomes how to pay for the taxes. I do have the ability to withdraw from an inherited IRA. Very specific question - If taxes for a conversion would come from an IRA, is it still worth it? Clearly better if I can pay the taxes from taxable. If it does come from the IRA, I realize I would also owe taxes on that withdrawal and that needs to be factored in as well. That is what I will be playing with next. Any thoughts on this as I play in my spreadsheet?
Money is fungible. You or your heirs will have to pay taxes on the tira account eventually.

You can pay for the conversions from the Roth account. Easiest method if you can’t cash flow it.
smitcat
Posts: 7887
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

Fly Guy wrote: Wed Jun 09, 2021 6:52 pm
smitcat wrote: Wed Jun 09, 2021 10:26 am
It is not that hard to run the pontential variables seprately and in concert with each other and form a chart for the possibilities.
We then know the significance of each potential variable in our case.
Running any/all variables that we see as reasonably possible thru a number of well designed calculators is a great advantage for review.
smitcat - Interesting thought about charting the results for all variables. What type of chart are you thinking? Using i-ORP for example, run an XY scatter graph with disposable income as one axis. What would you use for the other axis? Or for the second axis would you just use the variable that you are changing - so one chart showing disposable income and Roth conversion options, one chart showing disposable income and AA, one chart showing disposable income and age for SS, etc.? Apologies if this has been detailed before - I'm pretty new here - been soaking this forum up for the past couple of months. Thanks!
At the beginning we used some simple X,Y charts to compare most likely scenarios.
Lately we find that we just list the base case in details and then place other possible options below with both positive and negative $$.
Example - we chart are favorite baseline scenarion and then we have the options listed below in dollars per year of after tax (spendable) results :
$12K per year = X % market performace
-$8K per year = SS redux in 2034
Etc
It has provided the best quick insight into variables and there future inpacts for us anyway.
HeelaMonster
Posts: 191
Joined: Sat Aug 10, 2019 11:46 am

Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

privateID wrote: Wed Jun 09, 2021 7:19 am
cas wrote: Wed Jun 09, 2021 6:57 am .....2. When the IRS says "110% via withholding" they literally mean via *withholding* (from your paycheck in your case). They don't mean via estimated taxes paid via IRS Direct Pay, EFTPS, mailing a check to the IRS, etc.......
Thank you and interesting point on withholding vs estimated payments. I have always changed my tax payments via withholding. I actually find it easier to fill out a new W4 online with my employer where I can tell my employer to withhold extra money. Sounds like if I need to withhold more and I realize it later in the year, it is better to just do it via the W4 change where it is treated as a yearly amount and not broken into quarters where you have to make at least a certain amount each quarter.
[I also don't wish to derail and have scanned the other thread linked by cas, but my question is directly related to the current topic so will leave here....]

At least with Vanguard, it is not possible to withhold taxes from Roth conversions (ETA: On further inspection, Vanguard instructs that tax withholding isn't "available" during the Roth conversion, and this requires a separate process). Plus, most of us would likely prefer to pay taxes from other sources, to maximize the amount left growing in IRA. For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
Last edited by HeelaMonster on Thu Jun 10, 2021 11:51 am, edited 1 time in total.
user5027
Posts: 897
Joined: Sat Jun 16, 2012 8:54 pm

Re: Results of my modeling out Roth conversions

Post by user5027 »

HeelaMonster wrote: Thu Jun 10, 2021 9:32 am For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
We only have traditional IRAs, Roth IRAs and her Social Security. I rough out our taxes and figure the amount to convert in mid December. After doing the conversion I recheck the taxes and then do an IRA distribution with the majority withheld to get into the safe harbor before the year end. We are over age 59.5 in years. Easy-peasy.
VanGar+Goyle
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Re: Results of my modeling out Roth conversions

Post by VanGar+Goyle »

I think annual interest(penalty) for underpayment of estimated taxes is something like 3%, pro-rated for the actual number of days you are late?
Yes, The standard non-corporate Interest Formulas for Underpayments and Overpayments is the
Federal short-term rate plus 3 percentage points, so 3% + 0.13% Applicable Federal Rates (AFR) for June 2021
For the last 4 quarters, they rounded it down to 3% ( IR-2021-50, March 2, 2021 ).
Short-term rates were expected to remain near zero through 2023.

I am currently in the 22% bracket but do live in NY, so pay state taxes.
Some states like NY may charge 7.5% or more annually for late payments.
HeelaMonster
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Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

user5027 wrote: Thu Jun 10, 2021 10:16 am
HeelaMonster wrote: Thu Jun 10, 2021 9:32 am For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
We only have traditional IRAs, Roth IRAs and her Social Security. I rough out our taxes and figure the amount to convert in mid December. After doing the conversion I recheck the taxes and then do an IRA distribution with the majority withheld to get into the safe harbor before the year end. We are over age 59.5 in years. Easy-peasy.
Thanks, but aren't you then using retirement funds to pay your taxes? My question presumed that, for many of us, one goal of Roth conversions is to keep as much possible growing in tax-free retirement account. Using IRA funds to pay taxes works against that goal. Thus the standard advice to pay taxes from non-retirement funds, wherever possible?
hawkfan55
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Re: Results of my modeling out Roth conversions

Post by hawkfan55 »

user5027 wrote: ↑Thu Jun 10, 2021 10:16 am
HeelaMonster wrote: ↑Thu Jun 10, 2021 9:32 am
For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
We only have traditional IRAs, Roth IRAs and her Social Security. I rough out our taxes and figure the amount to convert in mid December. After doing the conversion I recheck the taxes and then do an IRA distribution with the majority withheld to get into the safe harbor before the year end. We are over age 59.5 in years. Easy-peasy.
Thanks, but aren't you then using retirement funds to pay your taxes? My question presumed that, for many of us, one goal of Roth conversions is to keep as much possible growing in tax-free retirement account. Using IRA funds to pay taxes works against that goal. Thus the standard advice to pay taxes from non-retirement funds, wherever possible?
HeelaMonster,
Everyone's situation is different. When you are retired, all financial resources are "retirement funds" I, for example, do not have a taxable account other than a high yield savings account that I use for upcoming expenses during the next six months or so. That leaves tax-deferred and Roth IRA accounts. If one has significant pensions and social security, you may already be towards the upper range of the 12% marginal tax bracket and even higher when tax deferred withdrawals and/or RMDs kick in. If doing Roth Conversions, the logical place to pay taxes is from tax deferred accounts. By spending down tax deferred accounts, you are reducing future RMDs while placing tax deferred monies into Roth tax free accounts that are not subject to Capital Gains. The goal is to smooth out your effective and marginal tax rates over the course of your retirement so that you don't pay unnecessary taxes or medicare premium costs.
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RetiredCSProf
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Re: Results of my modeling out Roth conversions

Post by RetiredCSProf »

In response to paying taxes on Roth conversions:

I am retired and converting to Roth. I withhold federal and state income taxes from my pension and I withhold federal taxes (at maximum rate) from SS. In the years when I had no RMD, I made quarterly estimated tax payments to federal and state, drawing from my taxable savings. Some years, I had a tax refund, which was included with estimated payments. One year I waited until the last quarter to make a Roth conversion and pay estimated taxes -- that meant filling out the dreaded tax form that splits income and tax payments into 4 quarters.

In RMD years, I withhold enough from the RMD to reach safe harbor for the RMD and planned Roth conversion. Thus, technically, I am drawing from tax-advantaged space to pay taxes on the Roth conversion, but this is money that I am required to distribute, anyway. I can increase QCDs to increase my Roth space.

I have a few challenges with this approach: I need to maintain a spreadsheet to calculate safe harbor. IRMAA tiers (determines my Roth space) are a guesstimate. Some brokerages / investment companies are more flexible than others when it comes to selecting amount to withhold in taxes on distributions. For example, TRowe requires a phone call if I want to withhold more than 10% of my federal withholding for state taxes.
Topic Author
privateID
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Re: Results of my modeling out Roth conversions

Post by privateID »

hawkfan55 wrote: Thu Jun 10, 2021 12:23 pm
user5027 wrote: ↑Thu Jun 10, 2021 10:16 am
HeelaMonster wrote: ↑Thu Jun 10, 2021 9:32 am
For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
We only have traditional IRAs, Roth IRAs and her Social Security. I rough out our taxes and figure the amount to convert in mid December. After doing the conversion I recheck the taxes and then do an IRA distribution with the majority withheld to get into the safe harbor before the year end. We are over age 59.5 in years. Easy-peasy.
Thanks, but aren't you then using retirement funds to pay your taxes? My question presumed that, for many of us, one goal of Roth conversions is to keep as much possible growing in tax-free retirement account. Using IRA funds to pay taxes works against that goal. Thus the standard advice to pay taxes from non-retirement funds, wherever possible?
HeelaMonster,
Everyone's situation is different. When you are retired, all financial resources are "retirement funds" I, for example, do not have a taxable account other than a high yield savings account that I use for upcoming expenses during the next six months or so. That leaves tax-deferred and Roth IRA accounts. If one has significant pensions and social security, you may already be towards the upper range of the 12% marginal tax bracket and even higher when tax deferred withdrawals and/or RMDs kick in. If doing Roth Conversions, the logical place to pay taxes is from tax deferred accounts. By spending down tax deferred accounts, you are reducing future RMDs while placing tax deferred monies into Roth tax free accounts that are not subject to Capital Gains. The goal is to smooth out your effective and marginal tax rates over the course of your retirement so that you don't pay unnecessary taxes or medicare premium costs.
I too have wondered about what HeelaMonstaer asked. Everyone's situation is different, so let me share mine. I am not retired yet, but do have an inherited IRA. Inherited IRAs, that do not use the new 10 year rules, use a different life expectancy table than my 401K. It is more aggressive than the one that will be used for my 401K and therefore will create larger RMDs. As such, one of my plans before SS/RMDs begin will be to deplete that inherited IRA (I will need to take money from somewhere, just saying that is a place I will deplete first). I am now about to begin some Roth conversions and wondering how, if needed, I will pay some of the taxes. In my case, it seems like this inherited IRA makes alot of sense as a potential source to pay conversion taxes as I get the extra benefit of depleting the higher RMD tax-deferred account. Once retired, I will still first draw from the inherited IRA but would not have a reservation about withdrawing from any of my tax-deferred accounts. At least that is the plan at the moment. But it starts to beg the question as to when to stop conversions if taxes will be paid from tax-deferred accounts.
HeelaMonster
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Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

privateID wrote: Thu Jun 10, 2021 12:54 pm
I too have wondered about what HeelaMonstaer asked. Everyone's situation is different, so let me share mine. I am not retired yet, but do have an inherited IRA. Inherited IRAs, that do not use the new 10 year rules, use a different life expectancy table than my 401K. It is more aggressive than the one that will be used for my 401K and therefore will create larger RMDs. As such, one of my plans before SS/RMDs begin will be to deplete that inherited IRA (I will need to take money from somewhere, just saying that is a place I will deplete first). I am now about to begin some Roth conversions and wondering how, if needed, I will pay some of the taxes. In my case, it seems like this inherited IRA makes alot of sense as a potential source to pay conversion taxes as I get the extra benefit of depleting the higher RMD tax-deferred account. Once retired, I will still first draw from the inherited IRA but would not have a reservation about withdrawing from any of my tax-deferred accounts. At least that is the plan at the moment. But it starts to beg the question as to when to stop conversions if taxes will be paid from tax-deferred accounts.
Thanks to you and others for replies. And yes, everyone's situation is different. As long as we're sharing, my own is a combination of (a) having lots of cash earning little, with which I am happy to pay taxes; (b) wanting as much as possible in IRA(s), for my own use and for heirs; and (c) having had it beat into my head (firmly, repeatedly) that one should never use IRA funds to pay taxes, if other funds available! Thanks again for helpful discussion.
:sharebeer
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privateID
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Re: Results of my modeling out Roth conversions

Post by privateID »

HeelaMonster wrote: Thu Jun 10, 2021 1:35 pm
privateID wrote: Thu Jun 10, 2021 12:54 pm
I too have wondered about what HeelaMonstaer asked. Everyone's situation is different, so let me share mine. I am not retired yet, but do have an inherited IRA. Inherited IRAs, that do not use the new 10 year rules, use a different life expectancy table than my 401K. It is more aggressive than the one that will be used for my 401K and therefore will create larger RMDs. As such, one of my plans before SS/RMDs begin will be to deplete that inherited IRA (I will need to take money from somewhere, just saying that is a place I will deplete first). I am now about to begin some Roth conversions and wondering how, if needed, I will pay some of the taxes. In my case, it seems like this inherited IRA makes alot of sense as a potential source to pay conversion taxes as I get the extra benefit of depleting the higher RMD tax-deferred account. Once retired, I will still first draw from the inherited IRA but would not have a reservation about withdrawing from any of my tax-deferred accounts. At least that is the plan at the moment. But it starts to beg the question as to when to stop conversions if taxes will be paid from tax-deferred accounts.
Thanks to you and others for replies. And yes, everyone's situation is different. As long as we're sharing, my own is a combination of (a) having lots of cash earning little, with which I am happy to pay taxes; (b) wanting as much as possible in IRA(s), for my own use and for heirs; and (c) having had it beat into my head (firmly, repeatedly) that one should never use IRA funds to pay taxes, if other funds available! Thanks again for helpful discussion.
:sharebeer
Alot can happen over the next 5 years, but if tax rates revert to 15%/25%, I still live in NY paying state taxes and I don't have the cash to pay all the conversion taxes out of pocket, I may only convert/withdraw to the top of the 15% bracket (probably a little more depending on actual yearly expenses) after I retire (doing conversions from now till that point as well, but mostly to the point of the AOTC income limit because I have a kid in college). Clearly, not preferring to pay taxes from the tax-deferred account is part of that reason. Running those numbers in my spreadsheet shows I may be ok staying in the 15% bracket after SS starts depending upon how some of those assumptions turn out. Obviously, in 5 years I will have a clearer picture.
Last edited by privateID on Thu Jun 10, 2021 2:21 pm, edited 2 times in total.
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FiveK
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Re: Results of my modeling out Roth conversions

Post by FiveK »

privateID wrote: Thu Jun 10, 2021 12:54 pmI am now about to begin some Roth conversions and wondering how, if needed, I will pay some of the taxes. In my case, it seems like this inherited IRA makes alot of sense as a potential source to pay conversion taxes as I get the extra benefit of depleting the higher RMD tax-deferred account.
Assuming this was inherited from a non-spouse (and thus ineligible for Roth conversion), at a minimum the RMDs become "cash on hand" for the purpose of paying taxes on eligible conversions, so yes that makes sense.
Once retired, I will still first draw from the inherited IRA but would not have a reservation about withdrawing from any of my tax-deferred accounts. At least that is the plan at the moment. But it starts to beg the question as to when to stop conversions if taxes will be paid from tax-deferred accounts.
When paying tax from cash on hand "the tie goes to the Roth" when comparing marginal tax rates now vs. later. In other words, if you could convert at 22% now or 22% later, converting now is slightly better because in effect you move the tax amount from taxable to Roth.

If you pay tax by withholding from the convertible IRA distribution, then there is no difference between converting at 22% now or later. If you would pay a lower marginal rate later, wait and convert later. If you would pay a higher marginal rate later, convert now.
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Re: Results of my modeling out Roth conversions

Post by hawkfan55 »

(c) having had it beat into my head (firmly, repeatedly) that one should never use IRA funds to pay taxes, if other funds available!
I agree with this mantra unless you've reached 59.5 years of age and do not have to pay a 10% penalty on tax deferred withdrawals. After that, all bets are off. It might still be advantageous to use after tax savings and/or tax deferred accounts to pay taxes or it might not... just depends on your individual situation.
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rab
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Re: Results of my modeling out Roth conversions

Post by rab »

hawkfan55 wrote: Wed Jun 09, 2021 6:49 pm
But were we supposed to have been making quarterly payments throughout the year?
We at retired and doing Roth Conversions up to the MFJ IRMAA cliff of around $172k so we are converting in the 22% marginal tax bracket. We do not have after tax savings in our retirement portfolio, only tax deferred IRA/403b and Roth IRAs. We have pensions and DWs SS of approximately $72k. We are taking distributions from tax deferred of around 100k. In addition to spending some of the distribution and completing IRA to Roth IRA Conversions of $40-50k, we pay our Federal Taxes by doing a separate distribution in mid-December of each year and direct Vanguard to send 100% of the distribution to the IRS as Federal Tax Withholding. This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. We make sure to meet the IRS Safe Harbor rule
Edit: This only works for people over 59 1/2 as those withdrawing from tax deferred accounts who are under 59 1/2 would have to pay a 10% early withdrawal penalty.
Thank you for this post, hawkfan55. I think this might be a good approach for me to use, as I am in a similar situation and I am over 59 1/2. The one thing that I did not understand about your post is the line: This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. Why is this considered as being withheld evenly through the year when all of the taxes are paid in December?
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FiveK
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Re: Results of my modeling out Roth conversions

Post by FiveK »

rab wrote: Thu Jun 10, 2021 2:30 pm The one thing that I did not understand about your post is the line: This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. Why is this considered as being withheld evenly through the year when all of the taxes are paid in December?
Because that is how Congress wrote the law. ;)

Why is withholding treated differently than estimated tax payments? See sentence above.

Why does Congress do what it does? That's outside the scope of this forum. :)
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Re: Results of my modeling out Roth conversions

Post by KlangFool »

rab wrote: Thu Jun 10, 2021 2:30 pm
hawkfan55 wrote: Wed Jun 09, 2021 6:49 pm
But were we supposed to have been making quarterly payments throughout the year?
We at retired and doing Roth Conversions up to the MFJ IRMAA cliff of around $172k so we are converting in the 22% marginal tax bracket. We do not have after tax savings in our retirement portfolio, only tax deferred IRA/403b and Roth IRAs. We have pensions and DWs SS of approximately $72k. We are taking distributions from tax deferred of around 100k. In addition to spending some of the distribution and completing IRA to Roth IRA Conversions of $40-50k, we pay our Federal Taxes by doing a separate distribution in mid-December of each year and direct Vanguard to send 100% of the distribution to the IRS as Federal Tax Withholding. This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. We make sure to meet the IRS Safe Harbor rule
Edit: This only works for people over 59 1/2 as those withdrawing from tax deferred accounts who are under 59 1/2 would have to pay a 10% early withdrawal penalty.
Thank you for this post, hawkfan55. I think this might be a good approach for me to use, as I am in a similar situation and I am over 59 1/2. The one thing that I did not understand about your post is the line: This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. Why is this considered as being withheld evenly through the year when all of the taxes are paid in December?
Does this work for state income tax too? Or, we have to do something else for State Income Tax?

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rab
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Re: Results of my modeling out Roth conversions

Post by rab »

FiveK wrote: Thu Jun 10, 2021 2:41 pm
rab wrote: Thu Jun 10, 2021 2:30 pm The one thing that I did not understand about your post is the line: This mid-December withholding distribution is considered by the IRS as withheld evenly throughout the year. Why is this considered as being withheld evenly through the year when all of the taxes are paid in December?
Because that is how Congress wrote the law. ;)

Why is withholding treated differently than estimated tax payments? See sentence above.

Why does Congress do what it does? That's outside the scope of this forum. :)
Got it. I was not focused on the key word: withholding.
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Re: Results of my modeling out Roth conversions

Post by ChrisC »

RetiredCSProf wrote: Thu Jun 10, 2021 12:41 pm In response to paying taxes on Roth conversions:

I am retired and converting to Roth. I withhold federal and state income taxes from my pension and I withhold federal taxes (at maximum rate) from SS. In the years when I had no RMD, I made quarterly estimated tax payments to federal and state, drawing from my taxable savings. Some years, I had a tax refund, which was included with estimated payments. One year I waited until the last quarter to make a Roth conversion and pay estimated taxes -- that meant filling out the dreaded tax form that splits income and tax payments into 4 quarters.

In RMD years, I withhold enough from the RMD to reach safe harbor for the RMD and planned Roth conversion. Thus, technically, I am drawing from tax-advantaged space to pay taxes on the Roth conversion, but this is money that I am required to distribute, anyway. I can increase QCDs to increase my Roth space.

I have a few challenges with this approach: I need to maintain a spreadsheet to calculate safe harbor. IRMAA tiers (determines my Roth space) are a guesstimate. Some brokerages / investment companies are more flexible than others when it comes to selecting amount to withhold in taxes on distributions. For example, TRowe requires a phone call if I want to withhold more than 10% of my federal withholding for state taxes.
Been retired since 2013, and started doing modest conversions back then (but had I known better, I would have amped up my conversions in the first few years of retirement). We've always been able to pay federal and state income taxes, including amounts from conversions, by withholding from my federal pension and meet 110% safe harbor. I withhold nearly half of my pension draw for federal and state income taxes. I might adjust my pension withholdings during the last quarter to ensure I'm within safe harbor. Thus far, I generally get a modest refund from the Feds and generally have to pay the State. However, in 2021, my conversions won't be subject to State income taxes so I'm expecting a refund from the State, as well. I get WEP reduced SS benefits and DW gets spousal SS benefits off of my record, but we don't withhold anything from those modest benefits. We're anticipating that when DW receives her own SS benefits later this year that we will withhold at the maximum rate.

I'm trying to avoid making estimated quarterly tax payments and so far it's working out in my pre-RMD days. Unless I go crazy with back to back, mega-Roth conversions in post RMD years, I think withholdings from pensions and SS will also work out for us when I go onto to RMDs. (We finished converting my DW's entire tax-deferred tIRA and 401Ks to Roth in 2020, so we don't have to worry about RMDs from her accounts.)

We're in the 3rd tier of IRMAA but DW is the only one paying for Medicare Part B. We're thinking of dis-enrolling from Medicare Part B and just relying on FEHB coverage, though this is probably unlikely to occur. Funny, one of the reasons she enrolled in Medicare Part B (and I didn't) was that we thought she'd have much higher medical expenses and that the Medicare/FEHB dual coverage would work out better for us. Turns out her medical expenses have been very minor; mine have been much higher -- and with FEHB only coverage for me -- it's worked out well. Nonetheless, even with the IRMAA charges, I think it's well worth doing the conversions even if they land us in the higher tiers of IRMAA. The IRMAA charges can add up but they shouldn't wag our ultimate goals for the conversions.
HeelaMonster
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Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

RetiredCSProf wrote: Thu Jun 10, 2021 12:41 pm In response to paying taxes on Roth conversions:

I am retired and converting to Roth. I withhold federal and state income taxes from my pension and I withhold federal taxes (at maximum rate) from SS. In the years when I had no RMD, I made quarterly estimated tax payments to federal and state, drawing from my taxable savings. Some years, I had a tax refund, which was included with estimated payments. One year I waited until the last quarter to make a Roth conversion and pay estimated taxes -- that meant filling out the dreaded tax form that splits income and tax payments into 4 quarters.

In RMD years, I withhold enough from the RMD to reach safe harbor for the RMD and planned Roth conversion. Thus, technically, I am drawing from tax-advantaged space to pay taxes on the Roth conversion, but this is money that I am required to distribute, anyway. I can increase QCDs to increase my Roth space.

I have a few challenges with this approach: I need to maintain a spreadsheet to calculate safe harbor. IRMAA tiers (determines my Roth space) are a guesstimate. Some brokerages / investment companies are more flexible than others when it comes to selecting amount to withhold in taxes on distributions. For example, TRowe requires a phone call if I want to withhold more than 10% of my federal withholding for state taxes.
I meant to follow up on this, regarding one specific point. The second paragraph makes perfect sense once you are in the RMD years. If you are required to distribute anyway, by all means use it for taxes (or whatever else you want).

But the first paragraph reminds me why I asked that question above, in the first place. The information up-thread suggested that the IRS only accepts WITHHOLDING as the source for safe harbor, and not estimated quarterly payments. If that is the case, the question is how to reach safe harbor in those early retirement years... after salary withholding is no longer an option, but before RMDs kick in? So far I've been making estimated quarterly payments... but that did, indeed, result in a small penalty (though I don't know if that was due to payment mechanism, or simply falling a bit short in my estimate).
user5027
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Re: Results of my modeling out Roth conversions

Post by user5027 »

HeelaMonster wrote: Thu Jun 10, 2021 11:44 am
user5027 wrote: Thu Jun 10, 2021 10:16 am
HeelaMonster wrote: Thu Jun 10, 2021 9:32 am For those who are retired and no longer have salary from which to withhold, what are the best options for dealing with taxes on conversions? I converted a large amount last year (Jan 2020, my first year in retirement) and immediately submitted 20% to IRS via estimated payment mechanism, but still was hit with a small penalty when taxes were filed.
We only have traditional IRAs, Roth IRAs and her Social Security. I rough out our taxes and figure the amount to convert in mid December. After doing the conversion I recheck the taxes and then do an IRA distribution with the majority withheld to get into the safe harbor before the year end. We are over age 59.5 in years. Easy-peasy.
Thanks, but aren't you then using retirement funds to pay your taxes? My question presumed that, for many of us, one goal of Roth conversions is to keep as much possible growing in tax-free retirement account. Using IRA funds to pay taxes works against that goal. Thus the standard advice to pay taxes from non-retirement funds, wherever possible?
HeelaMonster,

Yes I am. Yes it is. That is why I began with, "We only have traditional IRAs, Roth IRAs ..." Taxable is gone. At least I don't worry about capital gains anymore. :sharebeer
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FiveK
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Re: Results of my modeling out Roth conversions

Post by FiveK »

HeelaMonster wrote: Thu Jun 10, 2021 4:44 pm But the first paragraph reminds me why I asked that question above, in the first place. The information up-thread suggested that the IRS only accepts WITHHOLDING as the source for safe harbor, and not estimated quarterly payments.
The IRS gives preferential treatment to withholding, but it does accept estimated payments to avoid underpayment penalties as well.
If that is the case, the question is how to reach safe harbor in those early retirement years... after salary withholding is no longer an option, but before RMDs kick in?
Excellent question. Form 2210 will explain how the IRS does its calculations. If you have to go all the way through, it gets somewhat tedious, but if you need only go through the early parts it's not bad at all.
So far I've been making estimated quarterly payments... but that did, indeed, result in a small penalty (though I don't know if that was due to payment mechanism, or simply falling a bit short in my estimate).
Likely a combination of the two.
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