Author Topic: HUGE Roth conversion mistake  (Read 4374 times)

OzzieandHarriet

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HUGE Roth conversion mistake
« on: January 23, 2024, 06:38:44 PM »
We accidentally converted shares instead of dollars from a rollover IRA Vanguard account to a Roth IRA Vanguard account - and it's an enormous amount of money. We called them, and they are going to see if they can reverse it, but reading up on this, it doesn't look good. We MAY be able to scrape together enough to pay the taxes on this, but it's really bad.

The account owner (my husband) is over 59-1/2 and is retired.

We are sitting here panicking right now.

Has this happened to anyone else? Any advice?

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #1 on: January 23, 2024, 08:46:18 PM »
If anyone wants to send me a PM, that’s fine too.

seattlecyclone

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Re: HUGE Roth conversion mistake
« Reply #2 on: January 23, 2024, 09:53:49 PM »
Oof. What were you invested in? If it was VTSAX, for example, at $117/share that's a 117x bigger Roth conversion than you wanted to do. Even if the shares were only $10 that's still converting 10x more than you wanted.

I've done Roth conversions before at Vanguard and they have all sorts of warnings saying that this is irreversible and you should verify you're not doing the wrong thing before you hit the button. It would be nice if they can undo this for you, but you should prepare yourself for this transaction being done.

On the plus side you probably don't need to worry so much about RMDs anymore!

Also (assuming you did this since the first of the year) you've got until next April before most of the taxes actually become due. Just make sure you hit the safe harbors based on your 2023 income. He's old enough that if all else fails you can always pull from the Roth to pay the taxes.

terran

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Re: HUGE Roth conversion mistake
« Reply #3 on: January 24, 2024, 08:40:10 AM »
Bummer. Hopefully they can undo it, but if not, as far as scraping the money together to pay taxes, since he's over 59.5, your husband can withdraw from the Roth IRA without paying a penalty.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #4 on: January 24, 2024, 01:09:25 PM »
We are both over 59-1/2, so we can take the money out of both Roths, but there are restrictions (5-year rule for conversions, with penalties for violating it). Ultimately we will have to pay taxes on that money sometime, but we’d rather not have to pay it all in one year and take such a big hit to our net worth - or at the tax rate we’d be subject to. We do estimated taxes because we are both retired, and for that you have to set up payments ahead of time such that all taxes are paid by the next April 15.

We need to find someone competent to run the numbers for us.

dandarc

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Re: HUGE Roth conversion mistake
« Reply #5 on: January 24, 2024, 01:15:11 PM »
We are both over 59-1/2, so we can take the money out of both Roths, but there are restrictions (5-year rule for conversions, with penalties for violating it). Ultimately we will have to pay taxes on that money sometime, but we’d rather not have to pay it all in one year and take such a big hit to our net worth - or at the tax rate we’d be subject to. We do estimated taxes because we are both retired, and for that you have to set up payments ahead of time such that all taxes are paid by the next April 15.

We need to find someone competent to run the numbers for us.
Oof.

5 year rule on conversions doesn't apply to Qualified Distributions. The other 5-year rule (your first Roth IRA must have been opened 5+ years ago) could get in the way. Please tell me that your husband has had a Roth IRA (somewhere - I don't think it even has to be at the same broker) for over 5 years.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #6 on: January 24, 2024, 01:35:53 PM »
Oh, yes, we’ve both had Roths for a very long time, but the funds that we put in them for regular contributions (not conversions) may not be enough to pay this possible tax bill. According to what I’ve read, each Roth conversion starts a new 5-year countdown for that conversion’s money. I don’t think we’ve been doing the conversions that long - I’ll need to look at the account to see, and right now I can’t deal with it.

Vanguard said they’d get back to us by Friday about whether they can reverse this thing, but I’m not optimistic and am trying to think ahead to what we’ll need to do next.

It’s an understatement to say it seems really stupid to have to go through this over an obvious mistake rather than some crazy tax-avoidance scheme.

seattlecyclone

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Re: HUGE Roth conversion mistake
« Reply #7 on: January 24, 2024, 01:51:02 PM »
We do estimated taxes because we are both retired, and for that you have to set up payments ahead of time such that all taxes are paid by the next April 15.

Not exactly. See Form 1040-ES. Lines 1-11 of the estimated tax worksheet are all about what you expect your 2024 income and tax to be. 90% of that number goes on Line 12a. Then Line 12b is 100% of your 2023 tax (or 110% if your joint income was over $150k). You owe estimated tax based on the smaller of these two numbers. If your 2024 tax ends up being much larger than your 2023 tax it's fine to make estimated tax payments based on your 2023 tax and settle up next April for the difference.

Oh, yes, we’ve both had Roths for a very long time, but the funds that we put in them for regular contributions (not conversions) may not be enough to pay this possible tax bill. According to what I’ve read, each Roth conversion starts a new 5-year countdown for that conversion’s money.

A five-year clock does start with this conversion, yes, but this clock is only relevant when you make a "non-qualified" distribution from your Roth IRA. Based on your husband's age and the fact that he has had the Roth IRA open more than five years all of your distributions are "qualified" so there's no tax due regardless of the other particulars around conversion timing.

dandarc

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Re: HUGE Roth conversion mistake
« Reply #8 on: January 25, 2024, 10:36:23 AM »
A lot of incentive here to get your 2023 taxes done and filed ASAP!

I've noticed that tax issues are often smaller than people fear at first. I messed up something with a (now terminated that plan and transferred everything out to my tIRA, so I'd have to start a new one and rack up $250K in assets in it to even need to do this task I messed up again.) solo-K to the tune of a $19,500 bill coming from the IRS 2 years ago. In any event - I really did try to file that form timely that resulted in the penalty, but I messed up at the very last step of their website to actually submit it. And over a year after my request for abatement on the "Hey I tried!" basis, that ultimately cost me $0.

Here, maybe Vanguard can fix it but even if they can't you'll owe the tax but you have lots of reasonable options to pay out - including making a Qualifying Distribution with no tax from the now much larger Roth IRA that will hopefully have grown even more in the ~1 year you have until you have to pay the tax.

Louise

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Re: HUGE Roth conversion mistake
« Reply #9 on: January 25, 2024, 08:49:12 PM »
I hope they let you reverse this. It seems odd to me that there isn't some kind of grace period. This sounds like a mistake that is so easy to do!

nalor511

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Re: HUGE Roth conversion mistake
« Reply #10 on: January 26, 2024, 12:34:14 AM »
This happens all the time. The IRS will not let it be reversed. https://www.bogleheads.org/forum/viewtopic.php?t=308310

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #11 on: January 26, 2024, 05:51:20 AM »
This happens all the time. The IRS will not let it be reversed. https://www.bogleheads.org/forum/viewtopic.php?t=308310

Yeah, I read through that whole thread earlier this week. That’s why I’m not optimistic. But we did talk to a CPA who thought it was highly likely they could reverse it. If not, there are avenues to pursue for paying the taxes that will be less onerous.

SeattleCPA

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Re: HUGE Roth conversion mistake
« Reply #12 on: January 26, 2024, 06:58:17 AM »
I don't want to add insult to injury but two immediate thoughts pop into my mind:

1. You can and should definitely DIY simple 1040 returns. I've said that for decades. But just because someone can do or some blogger gives advice about a simple 1040 doesn't mean one should DIY the complicated stuff.

2. This is sort of outcome is one of the reasons I really dislike the near-religious fervor too many people feel about Roths. They usually are not that great an option. Most people don't save tax. Especially FIRE folk. Most people won't have RMD issues. Especially FIRE folk.

dandarc

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Re: HUGE Roth conversion mistake
« Reply #13 on: January 26, 2024, 08:34:09 AM »
I don't want to add insult to injury but two immediate thoughts pop into my mind:

1. You can and should definitely DIY simple 1040 returns. I've said that for decades. But just because someone can do or some blogger gives advice about a simple 1040 doesn't mean one should DIY the complicated stuff.

2. This is sort of outcome is one of the reasons I really dislike the near-religious fervor too many people feel about Roths. They usually are not that great an option. Most people don't save tax. Especially FIRE folk. Most people won't have RMD issues. Especially FIRE folk.

I kind of agree on Roth in general for FIRE folks, but "checked the wrong box at Vanguard" isn't really a "do your own taxes" problem or issue with Roth IRA at all.

ETA: If anything this is a situation that makes the case to hire a financial advisor, but I've seen professionals make so many mistakes in so many areas, I doubt doing that would help at all.
« Last Edit: January 26, 2024, 08:37:24 AM by dandarc »

terran

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Re: HUGE Roth conversion mistake
« Reply #14 on: January 26, 2024, 11:18:00 AM »
I don't want to add insult to injury but two immediate thoughts pop into my mind:

1. You can and should definitely DIY simple 1040 returns. I've said that for decades. But just because someone can do or some blogger gives advice about a simple 1040 doesn't mean one should DIY the complicated stuff.

2. This is sort of outcome is one of the reasons I really dislike the near-religious fervor too many people feel about Roths. They usually are not that great an option. Most people don't save tax. Especially FIRE folk. Most people won't have RMD issues. Especially FIRE folk.

This wasn't a case of a poor decision (making a Roth conversion you shouldn't), this was a case of making an honest mistake (converting X Shares instead of X dollars).

dandypandys

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Re: HUGE Roth conversion mistake
« Reply #15 on: January 26, 2024, 12:21:32 PM »
oh dear! I am crossing my fingers for you. Would love an update if you feel compelled! I hope I can learn from this and not forget it by the time I am ready to do selling.

ChpBstrd

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Re: HUGE Roth conversion mistake
« Reply #16 on: January 26, 2024, 01:41:13 PM »
Consult a tax professional on this question, but couldn't you just transfer the money out of the Roth and back into the traditional IRA for the same tax year as the withdraw was done for, and effectively the deposit offsets the withdraw for a net change of zero?

SeattleCPA

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Re: HUGE Roth conversion mistake
« Reply #17 on: January 26, 2024, 02:21:03 PM »
I don't want to add insult to injury but two immediate thoughts pop into my mind:

1. You can and should definitely DIY simple 1040 returns. I've said that for decades. But just because someone can do or some blogger gives advice about a simple 1040 doesn't mean one should DIY the complicated stuff.

2. This is sort of outcome is one of the reasons I really dislike the near-religious fervor too many people feel about Roths. They usually are not that great an option. Most people don't save tax. Especially FIRE folk. Most people won't have RMD issues. Especially FIRE folk.

This wasn't a case of a poor decision (making a Roth conversion you shouldn't), this was a case of making an honest mistake (converting X Shares instead of X dollars).

@terran I always appreciate your comments, wisdom and participation. I want to remind you that, based on the tax expertise you display and as previously mentioned, I believe you actually used to work for IRS or Treasury.

But I see stuff like this happen with Roth accounts all too often. The assumption that fiddling with this stuff is a no-brainer and easy? Not the reality I see.

P.S. The other easy mistake: Bungling the pro rata rules. The last real life example I saw of that? A few days ago...

secondcor521

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Re: HUGE Roth conversion mistake
« Reply #18 on: January 26, 2024, 02:28:19 PM »
Consult a tax professional on this question, but couldn't you just transfer the money out of the Roth and back into the traditional IRA for the same tax year as the withdraw was done for, and effectively the deposit offsets the withdraw for a net change of zero?

Not really.  That would be a Roth distribution (allowed, possibly penalized depending on OP's compliance with the 5-year rule) followed by an IRA contribution(s), which would only be allowed up to $8K per year per taxpayer, and only if the OP/spouse had that much taxable compensation.

There used to be a way to recharacterize Roth conversions, but that was removed by a change in the law a few years ago.

ETA:  As noted below, the custodian can also reverse it if it's an error on their part, but that's not the present situation.
« Last Edit: January 26, 2024, 02:43:08 PM by secondcor521 »

nalor511

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Re: HUGE Roth conversion mistake
« Reply #19 on: January 26, 2024, 02:32:25 PM »
I don't want to add insult to injury but two immediate thoughts pop into my mind:

1. You can and should definitely DIY simple 1040 returns. I've said that for decades. But just because someone can do or some blogger gives advice about a simple 1040 doesn't mean one should DIY the complicated stuff.

2. This is sort of outcome is one of the reasons I really dislike the near-religious fervor too many people feel about Roths. They usually are not that great an option. Most people don't save tax. Especially FIRE folk. Most people won't have RMD issues. Especially FIRE folk.

This wasn't a case of a poor decision (making a Roth conversion you shouldn't), this was a case of making an honest mistake (converting X Shares instead of X dollars).

These things only get reversed on the broker's mistake, not the customer's mistake, honest or otherwise. See linked thread above.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #20 on: January 26, 2024, 03:54:03 PM »
To respond to some comments:
-I've been doing our taxes myself for years (using some online tax prep sites - TurboTax, etc.). I pull together all the documents and all the rest. So I do have some understanding of how the 1040 works. I've also had to do Schedule C's for my self-employment income. We've never had a problem.

-Once the conversion is done, it can't be reversed. However, when we talked with someone from Vanguard, they said there is some question about whether their user interface is flawed (direct quote: "you aren't the first person who has done this, and you won't be the last"), and it is certainly clear what our intent was. Their website has gotten even more confusing lately, and I could have sworn the number we entered was the dollar amount and not shares, but something weird happened, apparently. We are still waiting to hear what they are willing to do. They didn't give us an outright "no," and as I said above, the accountant we consulted thought it was quite possible they would reverse this.

-We cannot contribute to our IRAs anymore because we don't receive taxable compensation anymore (except for my very small self-employment income). We both moved our tIRA funds to rollover IRAs a while back.

-I do wish we had not bothered with these Roths (now!), but the idea was to have some funds we could draw on in the future if we needed a larger amount for something (like real estate, or a medical emergency) without having to worry about taxes.

-What we (especially DH) are worried about is that if this conversion stands, we will have a very large taxable income for this year that will bump us up to the highest tax bracket, and no matter how we pay the tax it will take an extra chunk out of our net worth (vs. if we had taken the money out in smaller installments over time, as we had planned). It's not like we have LOST this money; it's sitting there earning interest tax-free as we type. My reasoning is that even if we do have to pay this tax bill, we can do it over some period of time (say, a year), and it might all work out not too badly in the end. If that's the case, we'll certainly consult a professional (CPA, preferably an enrolled agent).

Louise

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Re: HUGE Roth conversion mistake
« Reply #21 on: January 27, 2024, 07:48:28 AM »
I read that Boglehead thread. It sounds like it all worked out in the end for the poster. It stinks that it's irreversible! I'm sorry you had to go through this.

nalor511

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Re: HUGE Roth conversion mistake
« Reply #22 on: January 27, 2024, 11:31:06 AM »
-What we (especially DH) are worried about is that if this conversion stands, we will have a very large taxable income for this year that will bump us up to the highest tax bracket, and no matter how we pay the tax it will take an extra chunk out of our net worth (vs. if we had taken the money out in smaller installments over time, as we had planned). It's not like we have LOST this money; it's sitting there earning interest tax-free as we type. My reasoning is that even if we do have to pay this tax bill, we can do it over some period of time (say, a year), and it might all work out not too badly in the end. If that's the case, we'll certainly consult a professional (CPA, preferably an enrolled agent).

You will be much happier if you get yourself in the mindset that the conversion will stand. The BH thread linked above, the poster tried everything under the sun, and nobody (Vanguard, IRS, CPA, tax-advocate) was able to help. Ultimately they made it out ok, and possibly even ahead of converting/RMDs later. You will be best served by getting in the mindset of how to make lemondade with your lemons, than trying to reverse it. I know that people who will work much harder on getting it reversed than I can, have tried and failed. Customer service is going to try and sympathize with you, and get you what you want - and they're going to fail. Best to just accept it, and figure out how to minimize the negative impact, IMO. Best of luck

ChpBstrd

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Re: HUGE Roth conversion mistake
« Reply #23 on: January 27, 2024, 12:00:53 PM »
If reversal is not an option, and if you have a large tax bill coming up on April 15 that will cause cash flow problems, you might consider a HELOC or personal loan to float you through.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #24 on: January 27, 2024, 12:26:14 PM »
@nalor511 - that’s how I feel and mostly why I posted here, to see if anyone else had gone through this (also as a PSA!). I’ve been doing some back-of-envelope calculations to get some idea of what we’re facing.

@ChpBstrd - I think we can figure out the funding without borrowing, but we’ll check with an accountant.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #25 on: January 28, 2024, 10:09:16 AM »
Searching on the Vanguard site and then the internet, it appears other people are having LOTS of problems with the site this month.

Also, transaction history is completely gone since they forced everyone to switch to their brokerage last fall. On our Roth accounts, it is showing basically no funds available to withdraw even though we’ve had most of the money in those accounts for almost 10 years.

When we did the switch to the brokerage, the person on the phone assured me that nothing would change, but it appears that is not the case.

To be continued…

NotJen

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Re: HUGE Roth conversion mistake
« Reply #26 on: January 28, 2024, 10:28:02 AM »
On our Roth accounts, it is showing basically no funds available to withdraw even though we’ve had most of the money in those accounts for almost 10 years.

Does it say "Funds available to trade $0.00"?  That just means that you don't have a balance in your settlement fund (money market).  You still have a balance that's invested that you can sell, then withdraw.  (I assume - that's what my Roth shows.)

I believe that was the big difference in going to a brokerage account - it added the settlement fund to each account.  It made it more confusing to contribute/invest in a Roth for sure.  I can still go directly from my bank account -> VTSAX, but only if I hit the right buttons in the right order, lol.

Over the summer I *thought* I was making a Roth contribution, in my recordkeeping I noted a Roth contribution, but several months later I realized it was in my taxable account.  It wasn't a big deal, only $2k.  I could have left it there, but I ended up selling at a small loss and putting it in my Roth as intended.  Who knows if it was me not paying attention (possibly doing the transaction on my phone, which I generally avoid), or if the website did something unexpected.

Searching on the Vanguard site and then the internet, it appears other people are having LOTS of problems with the site this month.

That's a good heads up to take screen shots of each step when I'm doing conversions/larger transactions in the future.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #27 on: January 28, 2024, 11:07:05 AM »
On our Roth accounts, it is showing basically no funds available to withdraw even though we’ve had most of the money in those accounts for almost 10 years.

Does it say "Funds available to trade $0.00"?  That just means that you don't have a balance in your settlement fund (money market).  You still have a balance that's invested that you can sell, then withdraw.  (I assume - that's what my Roth shows.)

On one account, it’s showing zero for funds available to trade or withdraw; on the other (the one with the massive conversion amount in it), it’s showing only a small amount in those categories. On the main page it is showing all the money that is in those accounts. And there is no transaction history beyond the past month.

NotJen

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Re: HUGE Roth conversion mistake
« Reply #28 on: January 28, 2024, 11:20:02 AM »
That's definitely weird.  I can go to activity -> transaction history, and it will let me see 10 years of history in my Roth.  Even the history before it was transitioned to a brokerage account.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #29 on: January 28, 2024, 11:32:25 AM »
That's definitely weird.  I can go to activity -> transaction history, and it will let me see 10 years of history in my Roth.  Even the history before it was transitioned to a brokerage account.

Have you done that recently?

NotJen

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Re: HUGE Roth conversion mistake
« Reply #30 on: January 28, 2024, 11:36:39 AM »
That's definitely weird.  I can go to activity -> transaction history, and it will let me see 10 years of history in my Roth.  Even the history before it was transitioned to a brokerage account.

Have you done that recently?

Check my transaction history?  I was looking at it while I typed that post.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #31 on: January 28, 2024, 12:37:50 PM »
That's definitely weird.  I can go to activity -> transaction history, and it will let me see 10 years of history in my Roth.  Even the history before it was transitioned to a brokerage account.

Have you done that recently?

Check my transaction history?  I was looking at it while I typed that post.



Okay, I figured out how to see the entire history. Now I'm trying to understand how the 5-year rule applies to us.
« Last Edit: January 28, 2024, 12:40:50 PM by OzzieandHarriet »

seattlecyclone

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Re: HUGE Roth conversion mistake
« Reply #32 on: January 28, 2024, 05:31:43 PM »
Are you over 59½? Has your Roth IRA been open at least five years? If the answer to both questions is yes you can withdraw as much from your Roth IRA as you want, for free, whenever you like.

Omy

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Re: HUGE Roth conversion mistake
« Reply #33 on: January 28, 2024, 05:50:58 PM »
Does each Roth conversion have its own 5 year period...or is it just the first conversion that starts the clock?

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #34 on: January 28, 2024, 05:55:44 PM »
Does each Roth conversion have its own 5 year period...or is it just the first conversion that starts the clock?

I saw somewhere that it’s the former … but it wasn’t clear if that applies only if you’re under 59-1/2.

seattlecyclone

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Re: HUGE Roth conversion mistake
« Reply #35 on: January 28, 2024, 07:19:30 PM »
Once again, the five-year clock for Roth conversions is only relevant when you're making a non-qualified distribution. If you're over 59½ and have had a Roth IRA for at least five years your distributions are all qualified and tax-free. Doesn't matter how the money got in there or when.

Omy

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Re: HUGE Roth conversion mistake
« Reply #36 on: January 28, 2024, 07:36:02 PM »
Thanks. My eyes glaze over when I go down the 5 year rule rabbit hole for some reason.

secondcor521

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Re: HUGE Roth conversion mistake
« Reply #37 on: January 28, 2024, 08:11:11 PM »
Does each Roth conversion have its own 5 year period...or is it just the first conversion that starts the clock?

While you are under 59.5:

Roth conversions in a calendar (technically tax) year are put into one bucket. So three conversions done today, June 15th 2024, and December 11th, 2024 would all go into the "2024" bucket.  Those three conversions would be accessible five tax years later on 1/1/2029.

Each tax year has it's own five year clock.  So a fourth conversion on January 13, 2025 would go in the "2025" bucket and would be available on 1/1/2030.

It's all based on dollar amounts, too.  So if you converted $3000 of Tesla stock today, you'd have $3000 accessible to you on 1/1/2029 regardless of what happened to the price of those Tesla shares in your Roth (up or down) in the next ~5 years.

If you're over 59.5 and have had a Roth for five years, then you can forget about all the above, as seattlecyclone mentioned.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #38 on: January 28, 2024, 09:44:19 PM »
@seattlecyclone and @secondcor521 thanks! For I don't know what reason, I haven't seen a clear explanation of this in my searches. The table on this page confused me: https://www.fidelity.com/learning-center/personal-finance/retirement/roth-ira-5-year-rule

The text there, though, says what you both said (I added the bold here):
Quote
The Internal Revenue Service (IRS) requires a waiting period of 5 years before withdrawing balances converted from a traditional IRA to a Roth IRA, or you may pay a 10% early withdrawal penalty on the conversion amount in addition to the income taxes you pay in the tax year of your conversion. (There is an exception to the penalty for withdrawals if you are age 59½ or older.)

Anyway, this removes one headache on this thing, because we certainly have enough in our accounts to pay the tax if it comes to that.

Does anyone know of a calculator that could figure how much of a hit we'd take long term compared with where we'd be if this unplanned conversion hadn't happened? Or is it possible it could be a wash, or that we'd even do better? Very roughly (and forgive my simplistic description), we would have had to pay taxes on this money eventually, but it would have been spread out over a number of years at a lower tax rate, so basically we'd have paid a quarter of the funds in taxes. With the situation we're facing, we'll pay over a third in taxes upfront, but not on any gains we would make after the conversion. I'm not good enough at creating spreadsheets to make one that shows this.

secondcor521

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Re: HUGE Roth conversion mistake
« Reply #39 on: January 28, 2024, 09:57:38 PM »
Does anyone know of a calculator that could figure how much of a hit we'd take long term compared with where we'd be if this unplanned conversion hadn't happened? Or is it possible it could be a wash, or that we'd even do better? Very roughly (and forgive my simplistic description), we would have had to pay taxes on this money eventually, but it would have been spread out over a number of years at a lower tax rate, so basically we'd have paid a quarter of the funds in taxes. With the situation we're facing, we'll pay over a third in taxes upfront, but not on any gains we would make after the conversion. I'm not good enough at creating spreadsheets to make one that shows this.

As a very simple SWAG, it sounds like you paid 1/3 in taxes when you could have paid 1/4.  The difference is 1/12, so you can roughly compare it to paying 1/12 of your conversion amount as a "mistake tax".

So for example, if you made a $120,000 conversion, you basically paid a $10K "mistake tax", because you could have paid $30K in taxes but because of the mistake you paid $40K instead.

There is some time value of money (TVM) involved as well, because you wouldn't have had to pay that $30K all this year; it would have been spread out over future years.  How much this time value of money factor adds to the pain depends on how long in the future you would have had to pay the $30K, and what you would have been able to earn on the money while it was in your possession, *minus* any taxes you avoided paying on that growth.

Maybe the TVM factor makes the mistake tax $15K or $20K instead of $10K in my made up example.

...

Bottom line, either it'll get administratively reversed or it won't.  If it won't, I don't personally see much value in figuring out how much exactly the mistake tax was.  It's pretty clear from your comments that it's not minimal, but it also sounds survivable.  Try to learn from the mistake, but then also try to move on with what you can control, which is how you act moving forward.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #40 on: January 28, 2024, 10:29:39 PM »
Bottom line, either it'll get administratively reversed or it won't.  If it won't, I don't personally see much value in figuring out how much exactly the mistake tax was.  It's pretty clear from your comments that it's not minimal, but it also sounds survivable.  Try to learn from the mistake, but then also try to move on with what you can control, which is how you act moving forward.

You're probably right, but it would be interesting to know. I keep thinking there must be some benefit to having to pay little to no income tax for some years after the one bad year. We are invested fairly conservatively, so we haven't made all that much on those accounts considering how long we've had them.

One thing we've learned from this is that we want to take our savings out of Vanguard! They seem to be having problems.

secondcor521

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Re: HUGE Roth conversion mistake
« Reply #41 on: January 28, 2024, 11:34:13 PM »
You're probably right, but it would be interesting to know. I keep thinking there must be some benefit to having to pay little to no income tax for some years after the one bad year. We are invested fairly conservatively, so we haven't made all that much on those accounts considering how long we've had them.

I'm trying for your sake to imagine any.  Psychologically it may be nice to pay low taxes for some of the next few years, if that turns out to be the case.  Mathematically though, you probably paid at a higher rate last year than you needed to, and future low tax years don't really change that.

Two minor benefits:

You will have more tax free money available in your Roth now, so if you have a big purchase sometime soon like a new car or a new roof, then having access to those tax free Roth dollars will give you some tax flexibility - you'll be better able to buy the thing without having to increase your taxable income in that future year.

If your beneficiaries are in higher tax bracket and you pass away with money left in your IRAs, you probably left them better off by prepaying the taxes for them.  They'll have more flexibility, and will end up with more after tax dollars.

One thing we've learned from this is that we want to take our savings out of Vanguard! They seem to be having problems.

I read this a lot, especially lately.  I do think their customer service has declined markedly over the past ten years.  But the kinds of things I read about aren't particularly worse than anything that happens at Fidelity or Schwab or anywhere else.

Personally my family has had probably dozens of accounts at Vanguard of all types and sizes, with plenty of transactions of all types and sizes.  This includes my Mom passing away and the transition of her Vanguard accounts there.  We've done business with Vanguard since at least the mid-1980s.  Yes, there are features I would like to have sometimes, but over all that time and all those accounts and all those transactions, I've literally never seen an error or a mistake on their part (and I do doublecheck things frequently).  YMMV, of course, but I personally don't plan to move unless I see them make a mistake, and then only if they are unable or unwilling to correct it to my satisfaction.

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Re: HUGE Roth conversion mistake
« Reply #42 on: January 29, 2024, 06:20:20 AM »
Does each Roth conversion have its own 5 year period...or is it just the first conversion that starts the clock?

While you are under 59.5:

Roth conversions in a calendar (technically tax) year are put into one bucket. So three conversions done today, June 15th 2024, and December 11th, 2024 would all go into the "2024" bucket.  Those three conversions would be accessible five tax years later on 1/1/2029.

Each tax year has it's own five year clock.  So a fourth conversion on January 13, 2025 would go in the "2025" bucket and would be available on 1/1/2030.

It's all based on dollar amounts, too.  So if you converted $3000 of Tesla stock today, you'd have $3000 accessible to you on 1/1/2029 regardless of what happened to the price of those Tesla shares in your Roth (up or down) in the next ~5 years.

If you're over 59.5 and have had a Roth for five years, then you can forget about all the above, as seattlecyclone mentioned.

Thanks...very helpful!

Omy

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Re: HUGE Roth conversion mistake
« Reply #43 on: January 29, 2024, 06:37:41 AM »
The other possible positives I see about the mistake tax is that 1) you will have less IRA money subject to RMDs in the future, 2) tax brackets are probably at all time lows, 3) it might help you keep MAGI down for ACA purposes, 4) it might help with IRMAA, and 5) growth within the Roth won't be taxed in the future.

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #44 on: January 29, 2024, 08:53:19 AM »
Well, good news! They are going to reverse it! We are SO relieved.

Not a done deal yet, but the reversal has been approved and they are working on the mechanics.

But this has been an interesting discussion, so thanks for all the comments.
« Last Edit: January 29, 2024, 09:01:05 AM by OzzieandHarriet »

Omy

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Re: HUGE Roth conversion mistake
« Reply #45 on: January 29, 2024, 08:56:04 AM »
Excellent!

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Re: HUGE Roth conversion mistake
« Reply #46 on: January 30, 2024, 07:48:46 AM »
Congratulations!

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Re: HUGE Roth conversion mistake
« Reply #47 on: January 31, 2024, 05:41:04 AM »
Excellent news! BTW, between this thread and the one at Bogleheads I'll probably only make any conversions with shares, not dollars. It's a valuable PSA because I could see myself doing the same thing (I generally only buy/sell in $).

OzzieandHarriet

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Re: HUGE Roth conversion mistake
« Reply #48 on: January 31, 2024, 07:20:47 AM »
Update: it’s all fixed. RELIEF!

secondcor521

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Re: HUGE Roth conversion mistake
« Reply #49 on: January 31, 2024, 09:10:23 AM »
Yay!

You probably know this, but:

Were I in your shoes, I'd check the Vanguard website where it shows IRA distributions YTD and make sure that the information there matches what you would expect.

And if the conversion was in 2023, I'd make sure to get a corrected 1099-R before filing my 2023 taxes.

 

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