Roth conversion questions in Vanguard, plus some general questions

[mistymoney]

So I wanted to start to make some conversions while still working. I Assume that is fine and just pay the taxes like usual.

How are the taxes handled? Do they take out of the conversion - (convert 10k and they take 2k and convert 8k? or convert 10k and take another 2.5k out of account?) or can you pay with another method - (checking transfer or credit card?) or does it wait until you file taxes with IRS, and if so do you need to pay extimated taxes at the quarterly interval? Or can you up additional withholding at your W2 job to cover the expected taxes?

Can I transfer shares directly between rollover IRA and roth IRA at vanguard, rather than just cash? There is a convient "convert to roth" button, but I am afraid to click it lest the entire account atomatically convert and I have mega taxes at higher tax brackets as a result.

Is anyone experienced with this button and can tell me what is behid it before I click it?

[mistymoney]

One more question!

Do you have to do it by Dec 31 for this tax year, or can you wait till april 15th 2025 for a 2024 conversion just like a contributions to have your tax forms prepared and get info on how much you can transfer for certain tax ramifications?

[RWTL]

You have to do it by Dec 31 for this tax year....which kind of stinks but that's the deal.

I did several conversions while I was still working using Vanguard.  I've switched to another broker at this point.  I remember that you tell the system how much you want to convert - it won't just convert the whole account.  They always give you confirmation screens as well.

If you're working and you don't have enough taxes paid to cover the conversion, I would just increase your tax deduction via your paycheck rather than fool around with quarterly taxes.  An accountant may advise differently since you are likely obligated for the tax to be paid in the quarter it was incurred according to the IRS schedule.

I think they also give you the option to withhold if you want to, but I never did that.

[RWTL]

Also, I always had too much withholding, so rather than figuring out how much tax to have withheld, I was looking at how much I could covert via a Roth to spend down my excess withholding. 

[lhamo]

RE: taxes owed on conversions (or otherwise), I am not a CPA but the way I handled it was to do a rough calculation of what I would owe and then make an estimated payment prior to Jan 15 to make sure I paid enough to cover what I owed for the year.

[reeshau]

How are the taxes handled? Do they take out of the conversion - (convert 10k and they take 2k and convert 8k? or convert 10k and take another 2.5k out of account?)

You *could* have taxes withheld on conversion.   But, those aren't part of the conversion.  They would be a non-qualifird withdrawal, and you would owe taxes plus 10% penalty on them.

So, bad idea.

Estimated taxes aren't so bad.  You know what your tax situation is, and whether you usually get a refund, or not.  If you try to do it through your W2, then either match your conversions to the withheld amount (roughly, quarterly) or wait until near the end of the year, when you can likely do an early version of your tax return, to be sure.

You may make mistakes the first year, but you will learn from them, and can optimize in the following years.

[mistymoney]

Thanks all!

I will do a small one this year to get into the swing of things, and just up my payroll taxes to accomodate the extras.

Seems so easy, I thought it was going to be hard

[secondcor521]

So I wanted to start to make some conversions while still working. I Assume that is fine and just pay the taxes like usual.

How are the taxes handled? Do they take out of the conversion - (convert 10k and they take 2k and convert 8k? or convert 10k and take another 2.5k out of account?) or can you pay with another method - (checking transfer or credit card?) or does it wait until you file taxes with IRS, and if so do you need to pay extimated taxes at the quarterly interval? Or can you up additional withholding at your W2 job to cover the expected taxes?

Can I transfer shares directly between rollover IRA and roth IRA at vanguard, rather than just cash? There is a convient "convert to roth" button, but I am afraid to click it lest the entire account atomatically convert and I have mega taxes at higher tax brackets as a result.

Is anyone experienced with this button and can tell me what is behid it before I click it?

Answering some of the unanswered questions.

Yes, converting while working is fine.  Conversions will add to ordinary income, and job income plus conversions plus whatever other income could push you into a higher bracket; you're probably aware of that effect.

Vanguard doesn't withhold taxes (either state or federal) from Roth conversions if you use the website.  You *might* be able to withhold if you call in, but as the other poster mentioned, this is a bad idea if you are under 59.5.  Increasing withholding or estimated taxes are probably easier.

You pay the taxes on the conversion with your taxes.  Vanguard will send you a 1099-R in January-ish with the total amount of Roth conversions.  If the conversion is large enough and you don't pay enough via either withholding and/or estimated taxes, then you may owe an underpayment penalty.

Yes, you can convert shares in-kind at Vanguard.  The taxable amount will be the value of the shares as of the date of the transfer.  If you initiate a web transfer, the transaction will occur at the next close of the market.

The button does not convert the entire account without any confirmations ;-)  It asks you how much you want to convert, what assets you want to convert, etc.  There are some confirmation things about taxes which I forget what they are because I never choose them, and then there is a very obvious "Yes, I want to convert 3.014 shares of VTSAX from my traditional IRA to my Roth IRA today and I understand I probably will owe some income taxes on the conversion" confirmation screen.

[phildonnia]

So I wanted to start to make some conversions while still working. I Assume that is fine and just pay the taxes like usual.

Remember, conversions are considered ordinary income; and can put you in a higher tax bracket.  Consider making conversions when you're not working, and your overall income will be lower.

How are the taxes handled? Do they take out of the conversion - (convert 10k and they take 2k and convert 8k? or convert 10k and take another 2.5k out of account?) or can you pay with another method - (checking transfer or credit card?) or does it wait until you file taxes with IRS, and if so do you need to pay extimated taxes at the quarterly interval? Or can you up additional withholding at your W2 job to cover the expected taxes?

Generally, you report the conversion with your tax return, and pay the taxes then. 

You can make estimated tax payments or higher withholding if you like, but if your withholding is in line with the prior-year tax liability, then you won't be penalized.  If this is a first-time or one-off conversion, then you're probably fine.

(Note: Very rarely, the custodian may be required to withhold taxes from your conversion, but only if the IRS has instructed them to do so.  These withholdings are considered unqualified distributions, which is a Very Bad Thing.  If you've not been in serious trouble with the IRS before, then don't worry about it.)

[phildonnia]

One more question!

Do you have to do it by Dec 31 for this tax year, or can you wait till april 15th 2025 for a 2024 conversion just like a contributions to have your tax forms prepared and get info on how much you can transfer for certain tax ramifications?

Conversions are taxed in the year they are made, period.  You cannot do a conversion for the prior year, like you can with contributions, return of contributions, and recharacterizations.  Unfortunately, that means if you are trying to finesse your tax situation, you need to guess how it will affect things before you get your tax documents for the year.

One thing to consider -- and I am NOT RECOMMENDING ANYTHING OR GIVING YOU ADVICE -- make the conversion this year; then you can effectively "undo" it by making a deductible IRA contribution instead of a Roth contribution later.  This comes with its own set of gotchas and ramifications, so think about it carefully.

[GilesMM]

Why do you want to convert now while working as opposed to later when retired and conversions could be tax free?

[mistymoney]

Why do you want to convert now while working as opposed to later when retired and conversions could be tax free?

Just doing a little bit right now to get into the swing of things, understand the mechanics, how it works at tax time, etc.

I did the conversion and I think I did it right, but it has not been implemented yet so I will see in the next few days if it went through correctly.

[mistymoney]

One more question!

Do you have to do it by Dec 31 for this tax year, or can you wait till april 15th 2025 for a 2024 conversion just like a contributions to have your tax forms prepared and get info on how much you can transfer for certain tax ramifications?

One thing to consider -- and I am NOT RECOMMENDING ANYTHING OR GIVING YOU ADVICE -- make the conversion this year; then you can effectively "undo" it by making a deductible IRA contribution instead of a Roth contribution later.  This comes with its own set of gotchas and ramifications, so think about it carefully.

oh - interesting take! I will keep that in mind!

[mistymoney]

everything tranferred as intended!

thanks for the info and reassurances!

[secondcor521]

everything tranferred as intended!

thanks for the info and reassurances!

Yay!!