Roth IRA conversion tax reporting. I am so confused!

[Susan Calvin]

Make that confused and frustrated. You'd think this would be simple.

I want to convert my entire traditional IRA into my Roth IRA before the end of this year. The question is not whether that makes financial sense. I want to do it because I don't want to be forced into required minimum distributions. That's my only reason.

What I'm trying to figure out is what form or forms is or are required to pay the taxes on the thing by the deadline for paying estimated taxes.

The company that holds my IRA was of no help, as the form they referred me to said it only applied if you were converting part of it. They told me to consult a financial professional. I see no reason to pay for that when all I need to know is what the heck form do I fill out to report the conversion and pay the taxes.

Googling was no help either. It kept wanting to tell me about a backdoor conversion, which does not apply to me. It was no good at just telling me what form to fill out either.

In hindsight, I should have increased my withholding on one of my sources of retirement income at the beginning of this year and then I wouldn't have had to worry about it. Hindsight is 20/20.

Come to think of it, I'm not sure I even need to report the conversion until I do my 2024 taxes. All I really need right now, I think, is just to send in the estimated taxes on the thing.

Help?

[mahatmakanejeeves]

1. "The question is not whether that makes financial sense."

Last edited Wed Dec 11, 2024, 04:00 PM - Edit history (1)

It doesn't, not with the market at an all-time high. That is, if your traditional Roth is full of stocks.

You'll pay taxes on all those capital gains, all at once. I know you say you have no choice, but that's going to take a huge hit probably. *

The best time to convert is when the value of your traditional IRA is way down. That way, you'll minimize the capital gains.

Fourth quarter estimated taxes aren't due until January 15, 2025, IIRC.

I am not a tax attorney, or any kind of lawyer.

-- -- -- -- -- --

* They are not capital gains. I misspoke was wrong. The people who corrected me are right.

Full disclosure: where I tripped us was, I have a Roth IRA that has some shares of AAPL. Had I bought those shares of AAPL the normal way, i.e., not as part of a Roth IRA, I would be subject to paying a tax on the capital gains when I sold them. As it is, I have already paid taxes on the money that I contributed to the Roth IRA over the years, so the increase in share price is mine to keep.

Once again, I was wrong, and everyone who wrote to correct me was right.

My bad. It won't happen again, until it does.

[Susan Calvin]

2. Thanks.

That wasn't my question, though.

I also didn't say I had no choice. I said I wanted to.

[nmmi]

15. Capital gains is a non-issue with IRAs. One is taxed on the value of the IRA at the time of withdrawal or conversion

at one's regular aka ordinary tax rate, not the capital gains rate.

So, if one has a $500,000 traditional IRA and converts it to a Roth, one's taxable income increases by $500,000 and it is ALL taxed at one's ordinary tax rate. Every dime of it, all 5 million dimes.

A large amount like this would propel someone into the highest tax bracket, and would pay high tax rates on most of it. But some people don't care, until they do their taxes that is, and then find out this harsh reality.

Edited to add Then there are huge additional stealth taxes on seniors -- a larger part or all of one's Social Security benefit is taxed. And one's Medicare premium will soar if one is above $106,000 in AGI or so (twice that for a married couple). The key word on the additional Medicare premium amounts is "IRMAA". Effectively one's tax bracket becomes sky-high.

Hopefully a large amount is not involved in the OP's case.

I converted my traditional IRA to a Roth in small increments over the course of 2 decades so as not to pay taxes in a higher tax bracket on the conversion amounts.

[Susan Calvin]

16. Thank you.

It is good to know that the taxes on a conversion or withdrawal won't be as complicated as I thought they might have been. I'm very glad I asked here. Starting to look like even as much as I want to I really can't do it all at one time. Or not without paying more money for the convenience than even I want to.

[nmmi]

18. You're welcome. And I am so relieved you are considering doing small conversion amounts at a time

I just added a bit to my post above on how Social Security benefits and Medicare (key word: IRMAA) might be taxed too.

The IRA RMDs are a small pain in the ass, as one has to figure out the amount each year (although Fidelity, for one, will figure it out for you and automatically do the withdrawals if you set it up that way. I just do it manually each year for my inherited IRA (which can't be converted to Roth) because I disagree with Fidelity's number -- a very complicated inherited IRA situation).

[Susan Calvin]

19. You are so nice to be relieved on my account. Thank you.

I really wanted to just take care of the whole thing in one fell swoop and was willing to pay for the privilege, but it looks like I would be paying a lot more than even I am willing to.

[Shermann]

3. I do a small rollover like this every year

I've never dealt with any tax forms at the time of the rollovers. There is an option to have estimated taxes withheld by my brokerage company at the time of the rollover. I think (but am not positive) that this might be all you need to do. Then there will be a 1099-R form you will receive and need to include as part of your normal tax filing.

[Susan Calvin]

4. Thanks.

I don't want to have estimated taxes withheld from the rollover. I want to pay them by January 15th of next year, which, as I understand it, is the deadline. I just don't know what IRS form I need to do that.

In other words, I want to convert the entire traditional IRA into my Roth IRA and pay taxes on it from my checking account. I just don't know what form to use to pay said taxes. I don't know if you just use the regular one for estimated taxes, or if there is a particular one for a Roth conversion. In hindsight, I really wish I'd started having more taxes taken out of my retirement income at the beginning of this year, but obviously it's too late for that.

[mahatmakanejeeves]

5. Form 1040-ES Estimated Tax for Individuals

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

[Susan Calvin]

6. Oh thank you!

I can even pay it online!!

[mahatmakanejeeves]

7. You should get your November monthly statement from whoever runs your IRA in a few days.

You can use that to estimate your capital gains.

And good morning.

[Susan Calvin]

8. Oh great, one more thing to deal with.

Not much of it is in anything but CDs and money market funds, but a little bit is in a stock mutual fund. Well, I hope when the time comes that my tax software tells me what to do about that......

Thanks again for pointing me to the right place to pay the estimated taxes.

Should have converted it to a Roth right after I rolled it over from work to a conventional IRA, but that process was such a hassle that I didn't feel like dealing with yet another hassle right after. It's taken my 73rd birthday next year to get me off my rear end.

[kansasobama]

28. She will have no capital gains to separate out

She will pay on conversion

[question everything]

14. You don't have to wait to Jan 15. We pay the last estimated around the middle of December

so that we can itemize state tax. We itemized our deductions. It may be easy to pay half the tax owed this year and part by Jan 15.

If you have never paid taxes directly to the Federal government you want to be enrolled in the program EFTPS

https://www.eftps.gov/eftps/

[Susan Calvin]

12. I think yours is the best advice I have received,

At least as far as what I should do. Much as I really wanted to just take care of the whole thing in one fell swoop, I think I better do what you do, take the minimum distribution and do a partial rollover every year until I've got the darn thing taken care of.

Thank you.

[doc03]

9. I don't know your age. But I converted part of my IRA to a Roth at 64 one year before

I was eligible for Medicare. When I went on Medicare the first year, I paid the minimum Medicare
premium. The second year I was on Medicare my Medicare premiums doubled for that year. I made
the switch the year before to avoid paying a higher premium for Medicare. Then I found out they base
your Medicare premium on your income two years before. When I converted, I had the highest income that year
I had ever had in my life.
As far as the paperwork for the conversion and taxes T. Rowe Price took care of that.

[Susan Calvin]

10. I hadn't thought about that.

I still want to do it just to have it where I don't have to think about it anymore. I am fortunate enough not to need it for anything except self-insurance in the event I need long-term care. I don't want to take any withdrawals. Yeah, I should have thought about this sooner. If I don't do it this year, I have to start taking required minimum withdrawals next year.

Hopefully it won't be too bad on the Medicare. The year I retired I had a lot of unused leave that I got paid for, and I don't recall that it bumped up the Medicare a lot. I need to see if there's a calculator for that. Probably is.

[Susan Calvin]

11. Oh ouch.

I'm glad I wasn't successful just Googling the form I wanted and therefore asked here. That would be a pretty fair sized hit on Medicare for a year. Maybe I'll take a distribution large enough to get under the limit and then convert the rest. Wait, that doesn't make any sense. I didn't want to even have to think about this.

Or take the minimum distribution and convert an amount that keeps me under the limit. Or just take the minimum distribution and defer it some more, which knowing me is the choice I would bet on.

Yes, I'm smacking my head for not doing something about this sooner.

[question everything]

13. Are both the traditional and Roth with the same custodian? No forms are needed

Just tell them to do it.

You will owe tax and you may want to pay some already this year in a form of estimated taxes, You can do this online.

If you have never paid federal estimated taxes you will need to be enrolled in EFTPS

https://www.eftps.gov/eftps/

Obviously all other income should be considered when calculating estimated tax payments

[Susan Calvin]

17. They are. It was only the estimated taxes I was concerned about.

Of course, having posted here, I found out there were many other things to be concerned about. Many thanks to everybody.

[question everything]

20. Also, depending on the amount you may be subjected to Alternative Minimum tax.

In this case, talk to a CPA

[Susan Calvin]

21. Oh it's nowhere near enough for that.

After getting all the good advice here, I'm going to roll over just enough not to up my Medicare payment and then lather rinse repeat until it's all done, taking minimum required distributions along the way. Not what I wanted to do, but thanks to the advice here I know it would cost way too much to do what I wanted to do.

[nmmi]

22. You might consider NOT doing any Roth conversions --

They are great at a young or middle age, but are dubious for seniors. I'd at least check out the Roth conversion calculators out there -- that tell you whether it will really save you money over the long run (over the short run it obviously won't -- it costs you taxes up front to save relatively small amounts of taxes later on over several years). Roth conversions are also good when assuming what's invested will gets a high rate of return, much less so for lower rates of return). T Rowe Price used to have a good one but that was many years ago that I used it, it may still have.

This Google search got a lot of promising hits:
Roth conversion calculators - how much will a Roth conversion save me?

(I eventually made my own spreadsheet version, modeled on T Rowe Price's calculator, but that also takes into account that stocks in a regular (non-IRA) account have a lower capital gains rate that is less than the ordinary rate that apply to IRA RMD and other withdrawals and to Roth conversions. It's complicated to get into the weeds of it, but there is a lot of bubbly boo blather about Roth conversions in the media written by people who have no analytical skills, who are just parroting others with the same skills.

What is certain is that it very much depends on individual circumstances and assumptions about many future variables.

 IRAHelp.com is a great resource.
https://irahelp.com/forum/

I do my own taxes now (with the help of TurboTax), but for 40 years I had paid help, including 35 years with a CPA professional tax preparer / advisor. I learned a lot from him, as well as reading things like Retirement Watch newsletter that has a lot of focus on taxes, AAII Journal for decades (American Association of Individual Investors), among many others. I hope you will consider having a CPA tax preparer/advisor for a couple of years (at least) and going over this with them.

[Susan Calvin]

23. Thank you for all the detailed advice.

The reason I want to get it into the Roth is simply so I'm not required to take it out. I know it's going to cost me some money, and I don't care, within reason. Asking on this forum readjusted my attitude about what's within reason to the extent of getting me to do it piecemeal, but it didn't change my original goal. It's not all that much money anyway. If I do it piecemeal over the next few years, I think the extra withholding that I do anyway will pay for it.

As far as my time frame, according to my doctors, knock on wood, barring an accident, or cancer, or a stroke, I have every reason to expect at least another 20 healthy years. Knocking on wood again.

[nmmi]

24. Interesting - 20 years is my base case default assumption on longevity in my spreadsheet

Or at least when I need some of the money

barring an accident, or cancer, or a stroke, I have every reason to expect at least another 20 healthy years. Knocking on wood again.

That's what most people die from.

Aside from life expectancy, one may need the money sooner - another variable.

Having worked through innumerable scenarios over many years (like with Excel data tables where I can vary 2 variables at a time and get a matrix of results), I can say that it's not intuitive whether the Roth conversion saves or not.

[Susan Calvin]

25. Oh I'm sure it's not too intuitive.

That's why I'm glad I don't feel the need to work it out. All I want is not to take too big a hit on my taxes and none on my Medicare while getting it to a place where I'm not required to take it out. But I'm still glad I got talked into doing that piecemeal.

I didn't mean anybody expects me to have cancer, a stroke, or an accident. I meant they don't expect me to die just from my body wearing out or becoming unhealthy. Knock on wood.

[kansasobama]

26. If you can, spread it out until 2032

RMD is not all that bad. Why are you worried about it so much?:Anyway, spreading is better. Doing all at once is a very bad idea. With Trump in, you will benefit from the lowest taxes on conversion. Granted, we are all fucked after 2032 with draconian cuts. Also, this will screw the country. But our voters do not care. So, you might as well make use of what is coming and join the screw everyone else club. Not much of a choice.

[Susan Calvin]

31. I'm not worried. I don't think I ever said or implied that I was.

I just wanted to know what form to fill out pay my estimated taxes, and then I was happy to be talked into not doing it all in one fell swoop. But I still want to get it where I don't have to withdraw it if I don't want to. Why do I want to do that? Because I want to.

[kansasobama]

37. Penalty is minimal even if you do not pay estimated taxes on time

Sometimes growth in investment may be worth the penalty for late payment in estimated taxes

[doc03]

27. Another sugestion when you convert from a IRA to the Roth if you have enough

savings outside your IRA pay the tax from that rather than taking it from the principle in your IRA. Just tell
your custodian to not take out any tax from the IRA then pay the tax from you outside savings when you file taxes.

[kansasobama]

29. Good advice although

Easier said than done

[nmmi]

30. Absolutely. One advice that I keep reading consistently, is to never pay taxes from an IRA account, always pay the

taxes from a regular taxable account. If one pays the taxes from the IRA, the conversion NEVER works out economically from what they say. I'm not sure about that, but I do know that one is better off paying the taxes out of regular taxable money.

The OP said she is paying taxes from her checking account, which is probably a regular taxable account, in which case she is fine.

On reading another comment someone else made -- I believe that if one specifies say a 10% or 20% tax withholding to pay taxes on the conversion or withdrawal -- that it will, by default, be taken from a taxable account that one designates, at least at Fidelity and Vanguard where I've done this once or twice on conversions (at Vanguard), and on RMD withdrawals (at Fidelity). They will warn you if you try to do otherwise (if you try to pay taxes from an IRA account) No complicated instructions are needed to be made to the custodian. At least that's my experience at Vanguard and Fidelity.

As an aside, I usually don't do the 10% or 20% or whatever tax withholding (one can select their own percentage) when I do the conversion or take an RMD withdrawal, I just make sure I pay enough quarterly estimated taxes (from my bank's checking account -- a regular taxable account, via EFTPS - EFTPS is explained by question everything in posts #13 and #14). But sometimes doing the withholding during the conversion/withdrawal makes sense but that's getting into the weeds (the IRS considers that tax withholding to be spread out evenly through the year, even if one does the conversion/withdrawal in, say, December. And why that can be important is another trip to the weeds).

[Susan Calvin]

33. I'm glad I asked the question, as long as y'all didn't mind replying.

This has been very educational, and possibly of use to others.

[nmmi]

34. And then there is the NOT-simple matter about how much estimated tax to pay

if you don't pay enough tax either through withholding at the time of the conversion (similarly in the future when you take RMDs), and/or don't pay enough estimated taxes, you will owe a penalty and interest for underpaying estimated taxes. It's not punitively high, in didn't ruin my day when it happened to me, but it's a thing.

There are safe harbor provisions that make it easier. For most people:

1. If you pay in the same amount of taxes this year (deadline Jan 15, 2025) (I'm assuming you do a conversion this year) as you paid last year, you won't be charged an underestimation penalty or interest on the underpayment. If you used 1040-SR (for seniors) when you filed 2023 taxes, the amount you paid in 2023 is line 24. "Add lines 22 and 23. This is your total tax".

2. Ditto If you pay 90% or more of the taxes for the year than what your actual tax amount turns out to be, you are OK

3. Ditto if you end up owing less than $1,000 in taxes, you are OK

Google:
what is the safe harbor tax rule

And one has to do all this for state income taxes too, which may have different safe harbor rules / thresholds

as long as y'all didn't mind replying

Speaking for myself, I'm happy to do it. It's payback for all who have helped me with all kinds of issues in the past

[Susan Calvin]

35. I don't think that's going to be a problem in my particular case, but

Once again I learned something. I had no idea there was such a thing as a 1040-SR. If my tax software doesn't offer it to me, I don't know it exists. Of course, I only use the tax software because I'm too lazy to do the arithmetic myself. It's not really needed for the extremely low complexity level of my returns.

[nmmi]

36. I use TurboTax to do my taxes and file online. Then when I get it right I print my tax return to have a permanent

paper record to easily refer to. And to check to make sure that every input I made is reflected in it correctly, because sometimes I get confused by TurboTax's questions, so I want to make sure it all ended up right.

The main 2 pages is 1040-SR because I had to give it my birthdate so TurboTax knows I'm a senior (that's the "SR" in 1040-SR).

The only reason I brought up a specific line on 1040-SR is to make clear what total taxes paid in 2023 is and where to find that amount when looking at one's tax return. So as not to be confused by some who confuse it with a refund amount or additional tax due or amount withheld and paid in during the year or something else, as many do. It's a critical number for Safe Harbor purposes.

I would NEVER attempt to do my taxes with paper forms and paper and pen (pencil for a working draft) and do all the arithmetic involved in my complicated tax situation. WAYY to much math and way too many ways to screw up, and a nightmare to have to correct or change some number that affects several forms.

I'm glad to hear you use tax software too.

Edited to add - Even with tax software, it's not easy to figure out what one's estimated tax payments should be. If I'm OK with using the first safe harbor amount -- 100% of last year's actual taxes -- then it is easy. But some years I have a big taxes year and I want to use the 2nd safe harbor rule (greater than or equal to 90% of this year's tax amount) if I expect this year's taxes to be substantially less than last year's, so as to avoid paying in a lot more than I need to, thus giving the IRS a big interest free loan. In which case coming up with an estimate is difficult, even with tax software, i.e. making projections of what some input numbers will come out to be.

[Susan Calvin]

32. Yes, that was my plan.

That's why I was trying to figure out what form I needed to pay those estimated taxes.