Withholding from Roth Conversion, Then Replacing w/h in TIRA

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  • #3247
    kaneohe
    Participant

    I believe I have seen this suggestion (perhaps from Alan?):
    If you need additional withholding, do a TIRA withdrawal,perhaps withhold all of it, then replace that amount in TIRA within 60 days. How does that work out mechanically on the 1099R if all this is done within a tax yr?
    Before you do the replacement, you have e.g. a 1K distribution and a 1K withholding. After you do the replacement ,do you have a 0 distribution and a 1K withholding? which looks a little weird.

    Or perhaps the 1099R looks as it did before the replacement w/ 1K distribution and 1K w/h but you are rescued by box 2b checked,……taxable amt not determined and you have to explain what you did.

    • This topic was modified 2 years, 4 months ago by kaneohe.
    #3249
    Alan S.
    Participant

    Yes, because you can replace withheld amounts using other funds, you can complete a rollover while increasing your withholding. I think some custodian’s withholding % is limited to 2 digits, so 99% WH would be max at those custodians.

    While the 1099R will look like another other reported distribution with withholding, if you replace any of the withheld amount you are using up your one permitted rollover under the one rollover limit per 12 months, so this must be taken into consideration when deciding to do this. You would have to report the rollover on lines 4a and 4b of Form 1040 as usual, and if you are in an RMD year you would have to complete the RMD for that particular IRA account before you could roll any portion back to the IRA. In a non RMD year however you could have a 0 taxable distribution, but your withholding account is increased if you complete the rollover.

    #3250
    kaneohe
    Participant

    So assume non-RMD yr. Withdraw 1k, withhold 1K. 1099R shows same.

    Now replace 1K back to TIRA in same yr as withdrawal. 1099R remains
    unchanged? Tax return shows 1K withdrawal but 0 taxable with rollover code?

    What if 1K replacement to TIRA occurs in yr after withdrawal (but within 60days)? 1099R remains unchanged? Tax return same as above ?
    So end result identical no matter what yr rollover done in as long as within 60 day window?

    #3251
    Alan S.
    Participant

    Yes, correct. The 1099R remains unchanged regardless of what is done by the taxpayer. This is a distribution with the taxpayer option to complete a 60 day rollover despite the fact that the 1k was sent to the IRS. For a distribution late in the year, the 60 day period could result in the rollover contribution being made in the following year. But the 1040 will remain the same, reporting a rollover which eliminates any impact on the taxable income, but the withholding has been increased by 1k.

    Doing this could avoid any underpayment penalty since withholding is credited as if paid throughout the tax year, unlike quarterlies.

    The rollover could also be completed by making the contribution to a Roth IRA, and withholding would still be increased, but so would taxable income however no exposure to the one rollover limitation.

    #3252
    kaneohe
    Participant

    Thanks, Alan. Much appreciated. Clever idea on the Roth conversion in the last paragraph.

    • This reply was modified 2 years, 4 months ago by kaneohe.
    #4997
    ReachELS
    Participant

    Sorry to bump a 6 month old thread but I found this discussion intriguing and wanted to better understand the purpose.

    Assume that I want to convert $100k of a tira to a Roth and will incur $22k of federal taxes. I could simply make a $22k estimated tax payment at the time of the conversion or…as this thread suggests, withdraw $22k from my tira, withhold 99% of it (Vanguard’s max) and pay back the $22k from other funds within 60 days.

    While I can see that the rollover approach works, what advantage does this approach provide versus simply making an estimated tax payment? Does it have something to do with the $22k withholding being considered as paid equally throughout the year (even if it was not)? It does seem that you would avoid the annualized income installment test on Form 2210.

    Thank you in advance,

    John

    #4999
    Alan S.
    Participant

    Yes, this is all about paying taxes via withholding to avoid any underpayment penalty while also avoiding the 2201 AI form. It does not have to be done in conjunction with a conversion, but certainly can be.

    For example, if you want to convert 100k AND have 22k withheld, your conversion will actually be only 78k. To complete the conversion you must come up with 22k from your other funds and roll it into your Roth IRA within 60 days of receipt of the initial distribution. Since this is a conversion, the one rollover limit does not apply. However, if the 22k rollover is completed in the following calendar year (eg Jan, 2020), you will have a taxable conversion of 100k in 2019, but for purposes of the conversion 5 year holding period, you will have a 78k conversion in 2019 and a 22k conversion in 2020 as those were the years and amounts of the actual conversion contributions.

    As for cash flow, your TIRA will have distributed 100k, your taxable account spending will be 22k, your Roth IRA will be increased by 100k and your withholding account will be increased by 22k. Therefore you are down 122k, at least until your taxes are filed.

    #5001
    ReachELS
    Participant

    Thank you Alan….very clever.

    It seems like I have two possible approaches:

    1. Convert $100k from the tira while having $22k withheld and subsequently rolling $22k from savings into the Roth within 60 days OR

    2. Convert $100k from the tira with no withholding. Then do a second tira withdrawal for $22k and withhold (most if not) all of it. Within 60 days, I would roll $22k from savings back into the tira.

    Seems as though you end up at the same place…+$100k in Roth, -$100k in tira, -$22k savings.

    #2 seems cleaner to me?

    #5002
    Alan S.
    Participant

    Yes, either method will work so you could choose which one. In many cases, these transactions will occur very late in the year, and the rollover of the withheld amount must be done within 60 days, therefore is often done in January of the following year.

    Yes, Method 2 is simpler since it avoids having two conversion contribution dates with the conversion 5 year holding period possibly starting in different years even though the taxable income from the distribution is reported in the earlier year.

    Another option would be to do the withholding distribution first, and then the conversion. If this is an RMD year and the RMD has not been completed, it must be prior to doing a conversion. In some cases the withholding distribution will be large enough to satisfy the RMD itself.

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