Roth Conversion/Tax Withheld Then Deposited

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changingtimes
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Roth Conversion/Tax Withheld Then Deposited

Post by changingtimes » Sat Nov 10, 2018 4:02 pm

Earlier this year I built up my confidence and decided to do my first conversion from my Rollover IRA to a Roth IRA. (The Rollover was an old 401k, so all pre-tax) But I decided to start small, with just $1,000, as a test case.

Having not read enough threads, I didn't uncheck the box for Vanguard to *not* withhold 20% for federal tax, so only $800 of it was truly converted from the Rollover to the Roth. Then I read more threads and realized the error of my ways, and tossed in $200 from after-tax money.

Now as I think about doing a yearly contribution (the first time HHI has allowed me to), Vanguard says that I have already contributed $200 of my $6500 yearly limit.

Obviously, $200 is no big deal, but I was just wondering if someone could spell out any particular ramifications I might encounter having done this after-the-fact replacement of the money that was withheld. Hopefully jail isn't one of them. :)

retiredjg
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by retiredjg » Sat Nov 10, 2018 4:26 pm

Vanguard must be made aware that the $200 was a rollover. It appears you just deposited it and didn't tell them that. Or you did tell them and they didn't record it right.

Since you say "tossed in $200..." I suspect you did not tell them it was a rollover. And so they think that is an ordinary contribution for 2018.

I have no idea if they can fix this for you, but the only way to know is to call them and tell them you messed up and that the $200 was a rollover, not an ordinary contribution.

Jail is not in your future, at least not for this. :happy However, if you are not yet 59.5 years old, there will be an early withdrawal tax penalty on that $200 that was used to pay taxes if you cannot get them to change it. The penalty would be small ($20) and you would also owe taxes on that $200k.

Smart of you to do a trial run. Let us know what you find out.

Edited to add....if you are over 59.5 there is nothing that must be fixed. There will be taxes on the $200 but no penalty for early withdrawal. And you just let the $200 contribution stand and contribute $200 less for your annual contribution.

Alan S.
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by Alan S. » Sat Nov 10, 2018 11:37 pm

Don't know why they withheld 20%. The default withholding rate for IRA distributions is 10%. Perhaps you asked for 20%?

You still have a chance to have VG change the contribution to a conversion contribution, since VG has not reported this yet on Form 5498. They may or may not change it, but your chance is much better now than after year end.

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Peter Foley
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by Peter Foley » Sat Nov 10, 2018 11:45 pm

It is hard for me to decipher exactly what you did to try to correct the tax withholding. It sounds like you contributed $200 in after tax money to an IRA with only pre-tax contributions. If this is true it will make future Roth conversions a little more complicated.

changingtimes
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by changingtimes » Sat Nov 10, 2018 11:52 pm

Peter Foley wrote:
Sat Nov 10, 2018 11:45 pm
It is hard for me to decipher exactly what you did to try to correct the tax withholding. It sounds like you contributed $200 in after tax money to an IRA with only pre-tax contributions. If this is true it will make future Roth conversions a little more complicated.
No, I added it to the Roth to "complete" the full transfer after they withheld the $200.

Thanks for the suggestion from the other posters to contact Vanguard. Maybe Flagship status will actually show a benefit for once! :)

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celia
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by celia » Sun Nov 11, 2018 4:36 am

retiredjg wrote:
Sat Nov 10, 2018 4:26 pm
... tell them you messed up and that the $200 was a rollover, not an ordinary contribution.

Jail is not in your future, at least not for this. :happy However, if you are not yet 59.5 years old, there will be an early withdrawal tax penalty on that $200 that was used to pay taxes if you cannot get them to change it. The penalty would be small ($20) and you would also owe taxes on that $200k.

Smart of you to do a trial run. Let us know what you find out.

Edited to add....if you are over 59.5 there is nothing that must be fixed. There will be taxes on the $200 but no penalty for early withdrawal. And you just let the $200 contribution stand and contribute $200 less for your annual contribution.
If you ARE over 59.5, you can/should do the same notification to Vanguard, so that you can get an extra $200 into the Roth with your upcoming contribution.

Regardless of your age, the $200 had to go into the Roth within 60 days of the conversion to be eligible to be considered part of the conversion. If it was more than 60 days, there's no use calling them as they will have to leave it as part of your contribution.
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.

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celia
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by celia » Sun Nov 11, 2018 4:47 am

Peter Foley wrote:
Sat Nov 10, 2018 11:45 pm
It is hard for me to decipher exactly what you did to try to correct the tax withholding. It sounds like you contributed $200 in after tax money to an IRA with only pre-tax contributions. If this is true it will make future Roth conversions a little more complicated.
I'm pretty sure the OP meant "after tax money" to be "money from a taxable account" (such as a checking account). that was thrown into the Roth to compensate for the withholding. It wouldn't make sense to withdraw $1,000 from a tax-deferred account and send $200 of it to the IRS, then "fix" the withholding by withdrawing from the tax-deferred account again. Then taxes would have to be paid on the $1,200 distribution.

If the IRA did contain pre-tax and non-deductible contributions before starting, you would be correct that that makes things more complicated.
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.

changingtimes
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Re: Roth Conversion/Tax Withheld Then Deposited

Post by changingtimes » Sun Nov 11, 2018 9:34 am

celia wrote:
Sun Nov 11, 2018 4:36 am
If you ARE over 59.5, you can/should do the same notification to Vanguard, so that you can get an extra $200 into the Roth with your upcoming contribution.

Regardless of your age, the $200 had to go into the Roth within 60 days of the conversion to be eligible to be considered part of the conversion. If it was more than 60 days, there's no use calling them as they will have to leave it as part of your contribution.
Not over 59.5, and the $200 went in hours after the initial conversion.

I will contact my rep tomorrow and report back.

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