I think this is a little too strong for those after 59.5. I am considering fairly large Roth conversions to reduce this size of future RMDs (and thus IRMAAs for example) and certainly don't have after-tax funds to cover the tax. Withholding makes sense to me, even if it reduces the size of the Roth.
Don't withhold taxes. Let the money grow tax free and pay the taxes the following year when you file for taxes. If you earn 6% on your money, you just pay .5% penalties on the amount of taxes you did not withheld. Just take the money from the Traditional IRA to pay the taxes.
@@damis2372 From Investopedia: Underpayments are subject to the failure-to-pay penalty, which is 0.5% of the amount owed for each month and the part of a month for which the tax is not paid. Tax underpayments and overpayments accrue interest as well. The IRS determines the interest rate every quarter, generally basing it on the federal short-term rate plus three percentage points for most individual taxpayers. The rates were 8% for individual underpayments and 7% for large corporate underpayments for the fourth quarter (Q4) of 2023 and the first quarter (Q1) of 2024.
A couple of assumptions may not be true. 1. You assume the conversion is to put as much money into tax-free growth. 2. You assume we have working income to withhold taxes on a paycheck. For me, conversions are to reduce my tax-deferred balance so the future RMD won’t be so large. For retired people, there is no paycheck so, withholding on the conversion makes sense (for those older than 59.5). Otherwise, other investments might need to be sold to pay taxes (which might not make sense).
What if we are expecting huge RMDs? We don't have cash to pay 10s of 1000s in Roth conversions. Shouldn't we pay the tax with the 401K funds up to the 22% bracket (or 24% for that matter) to avoid paying 37%+ on that money, plus growth, later?
The biggest priority of the Roth conversion is to use the low tax brackets. This is still accomplished when withholding from IRA. That is the real victory. The second victory is to maximize growth in the Roth. So ideally we get as much money into the Roth by not withholding from IRA but it’s not the #1 priority to adhere to
Good stuff. What you are describing is ideal... Over 59.5 and retired. Need my cash for a market downturn... Thus, Its just too risky to pay the tax using cash on hand. I'd rather withhold during the conversion and have a pleasant April (tax day)...
Thank you for the thoughtful video. I just spent many hours on the question about when to pay the taxes on a conversion. You can pay estimated taxes on the conversion in the quarter that it is done, but you might not HAVE to. I can convert in 2024 and pay the taxes April 15th 2025. If you're interested in knowing what you can do, keep reading. There's a chart on page 20 of the IRS publication "About Publication 505, Tax Withholding and Estimated Tax." If you want, you can also complete the worksheet on page 8 of the "Form 1040-ES." I'm very pleased with this because I'll have a year to save up what is needed. This will allow me to max my Roth contributions for years 23 and 24. Yay!!
What if im twenty years from retirement and currently have 57k in a traditional that i want in a roth to compound and grow tax free. Would it make sense to do a conversion? I already do two conversions a year from my 401k to the roth and like how thats going. Any advice on the traditional?
63 retired, almost all funds are in deferred accounts. Need free cash i have to live off of. No real choice but to pay out of conversion. I have some stocks in brokerage but if i sell then i will bump up to 15% capital gains. Catch 22- pay put of conversion or pay higher rates after 73.
I recently did an Roth Conversation and opted out from paying taxes on the conversion. I want my entire amount to grow tax free. I updated my W4 to withhold more money for taxes.
If you happen to make a mistake and pay the tax out of the conversion you can reduce some of the damage by purchasing the like stock with your other cash . Example You pay the tax on a 50k conversion with your other money you will end up with 50k in the roth but you will be 10k less after paying the tax.(20% tax) OR If you make a mistake and pay the tax out of the 50k conversion your roth will be reduced to 40k You can undo some of the damage by taking the 10k from your cash (that did not go towards the tax,)and purchase the like stock in a brokerage account. So now you end up with the same 50k invested except you will have 40k in the roth and 10k in the brokerage account.
Sure but that really doesn't undo the claimed mistake, as the $10K is subject to tax on growth, unlike if it had been in the Roth. Plus of course the unused cash may well have been invested in similar stocks anyway. I agree that IF you can pay for the conversion without withholding (and it doesn't cause issues like causing you to cash out positions when you don't want to or depleting necessary emergency funds) then that is preferable to withholding. But some of us can't and I am saying that I don't think that is such a huge mistake. Once you pay the tax on the Roth conversion with other funds, those funds are gone, it's not like a Roth contribution where it can be withdrawn if needed.
It's better to keep thousands of dollars in cash not working for you and pay taxes out of that. Better yet, put your taxes on your credit card and pay a 22% interest rate. This is stupid advice unless you are under 59.5 years old.
I think this is a little too strong for those after 59.5. I am considering fairly large Roth conversions to reduce this size of future RMDs (and thus IRMAAs for example) and certainly don't have after-tax funds to cover the tax. Withholding makes sense to me, even if it reduces the size of the Roth.
I agree 100%. If you’re making a large conversion where’s that tax money supposed to come from? Especially if you’re already retired.
Don't withhold taxes. Let the money grow tax free and pay the taxes the following year when you file for taxes. If you earn 6% on your money, you just pay .5% penalties on the amount of taxes you did not withheld. Just take the money from the Traditional IRA to pay the taxes.
Exactly. It's just basically taxes rates you pay now compared to tax rates you'll pay in the future.
@@damis2372
From Investopedia:
Underpayments are subject to the failure-to-pay penalty, which is 0.5% of the amount owed for each month and the part of a month for which the tax is not paid.
Tax underpayments and overpayments accrue interest as well. The IRS determines the interest rate every quarter, generally basing it on the federal short-term rate plus three percentage points for most individual taxpayers.
The rates were 8% for individual underpayments and 7% for large corporate underpayments for the fourth quarter (Q4) of 2023 and the first quarter (Q1) of 2024.
A couple of assumptions may not be true. 1. You assume the conversion is to put as much money into tax-free growth. 2. You assume we have working income to withhold taxes on a paycheck. For me, conversions are to reduce my tax-deferred balance so the future RMD won’t be so large. For retired people, there is no paycheck so, withholding on the conversion makes sense (for those older than 59.5). Otherwise, other investments might need to be sold to pay taxes (which might not make sense).
What if we are expecting huge RMDs? We don't have cash to pay 10s of 1000s in Roth conversions. Shouldn't we pay the tax with the 401K funds up to the 22% bracket (or 24% for that matter) to avoid paying 37%+ on that money, plus growth, later?
The biggest priority of the Roth conversion is to use the low tax brackets. This is still accomplished when withholding from IRA. That is the real victory. The second victory is to maximize growth in the Roth. So ideally we get as much money into the Roth by not withholding from IRA but it’s not the #1 priority to adhere to
Good stuff. What you are describing is ideal...
Over 59.5 and retired. Need my cash for a market downturn... Thus, Its just too risky to pay the tax using cash on hand. I'd rather withhold during the conversion and have a pleasant April (tax day)...
Thank you for the thoughtful video.
I just spent many hours on the question about when to pay the taxes on a conversion. You can pay estimated taxes on the conversion in the quarter that it is done, but you might not HAVE to.
I can convert in 2024 and pay the taxes April 15th 2025. If you're interested in knowing what you can do, keep reading. There's a chart on page 20 of the IRS publication "About Publication 505, Tax Withholding and Estimated Tax." If you want, you can also complete the worksheet on page 8 of the "Form 1040-ES." I'm very pleased with this because I'll have a year to save up what is needed. This will allow me to max my Roth contributions for years 23 and 24. Yay!!
What if im twenty years from retirement and currently have 57k in a traditional that i want in a roth to compound and grow tax free. Would it make sense to do a conversion? I already do two conversions a year from my 401k to the roth and like how thats going. Any advice on the traditional?
63 retired, almost all funds are in deferred accounts. Need free cash i have to live off of. No real choice but to pay out of conversion. I have some stocks in brokerage but if i sell then i will bump up to 15% capital gains. Catch 22- pay put of conversion or pay higher rates after 73.
I recently did an Roth Conversation and opted out from paying taxes on the conversion. I want my entire amount to grow tax free. I updated my W4 to withhold more money for taxes.
If you happen to make a mistake and pay the tax out of the conversion you can reduce some of the damage by purchasing the like stock with your other cash .
Example
You pay the tax on a 50k conversion with your other money you will end up with 50k in the roth but you will be 10k less after paying the tax.(20% tax)
OR
If you make a mistake and pay the tax out of the 50k conversion your roth will be reduced to 40k
You can undo some of the damage by taking the 10k from your cash (that did not go towards the tax,)and purchase the like stock in a brokerage account.
So now you end up with the same 50k invested except you will have 40k in the roth and 10k in the brokerage account.
Sure but that really doesn't undo the claimed mistake, as the $10K is subject to tax on growth, unlike if it had been in the Roth. Plus of course the unused cash may well have been invested in similar stocks anyway.
I agree that IF you can pay for the conversion without withholding (and it doesn't cause issues like causing you to cash out positions when you don't want to or depleting necessary emergency funds) then that is preferable to withholding. But some of us can't and I am saying that I don't think that is such a huge mistake. Once you pay the tax on the Roth conversion with other funds, those funds are gone, it's not like a Roth contribution where it can be withdrawn if needed.
Awesome detail and information for converting! 👏👏👏
It's better to keep thousands of dollars in cash not working for you and pay taxes out of that. Better yet, put your taxes on your credit card and pay a 22% interest rate. This is stupid advice unless you are under 59.5 years old.