• 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5

Roth Conversion

I am trying to convert some of my regular IRA to Roth.  Fidelity has good tool to analyze this.  But there is one thing confuses me.  There is an selection for how to pay taxes associated with conversion.  Is it from IRA (meaning keep portion of the withdrawn funds for tax) or pay it out of other savings.  The site keep saying I should pay from other funds.  But I would prefer to use funds from IRA, that would help me keep track of how effective this conversion has been.
I can can withdraw without any penalty -over 59.5 old.
Any opinions?
You can pay the tax from any source you want. Understand that if you withdraw from an IRA to pay taxes owed, then that IRA withdrawal will also be taxable - the taxes are due next April 15 and can be paid at that time if you want - you do not have to withhold tax at the time of conversion - fidelity will send forms to both you and the IRS showing what you did.
PAY TAXES OWED FROM OTHER FUNDS!! Fidelity is absolutely correct.
I have done probably dozens Roth conversion since 1998 as a an estate planning tool.
Have analyzed it both ways. Paying taxes out of conversion amount is senseless as the end result then is the same as leaving it in the conventional IRA. No advantage to the conversion. You only will be ahead over time if you pay the taxes from other taxable source and convert the total amount!  Besides you do not know yet how much taxes you will own anyway.
I have been amazed to see expensive and "professional wealth managers" blunder this way. They do not like conversions because it means extra work and they should watch it in case of recharacterizations.
And also they confuse it with MRDs where it is OK to select to withhold taxes as the money goes to a non-ira taxable account.
Another tip:
Way to do it is:
2. First take your MRD in January in year one. I do this first week of January. You then have until October 15th of year two to undo your conversion (recharacterize) if the market goes south in the next 21 months. That is why point 1.is important.
Let's assume you convert 3 different stocks into 3 separate new accounts: A, B and C.
21 months later you did great with A and C that went up nicely but you have a loss on stock B. You now can pick and chose and selectively undo (recharacterize) your stock B conversion without paying taxes on your LOSS on stock B. Something you cannot do when you dumped everything together in one big Roth (as professionals also do).
Now you can convert stock B again the next year or 30 days later (whichever is later) if you still believe in it but at a much lower tax cost 
Another reason for the separate accounts is that you are not supposed to touch that conversion for 5 years. Or the dividends? Forgot the exact reason but you can look that up yourself.
AND as a bonus separate allow you to keep track and get performance data for each of your conversions!! 
Had to undo conversions twice over the last 20 years, in 2008 (3 conversions) which I happily recharacterized just to reconvert the same stocks again in 2009 at a much lower tax cost. And I believe the other one was in 2000.
Stick to your guns when a Fidelity rep asks you why you have TEN Roth IRAs and then suggests to combine them all.Happened to me a couple of times. I believe Fidelity now shows the above info on its mother of all websites. I still have a dozen or so Roth IRA accounts. Some of which are now old enough for tax reasons to merge. But like you I like to see the results of my decisions many years later.
Whether you withhold taxes or not does not accommodate this anyway.
It helps a lot if you pick the right stocks of course. Conversion only makes sense if the stock goes up long term. If it goes down you paid to much tax and have a loss on top. But you have the 21 months. And you can trade in a Roth without tax consequences of course. Of which I am not a fan. Nothing beats long term investing in a few good companies. Good luck with your conversions. But do it right.
Excellent points.  Now given what you say it perfectly makes sense to do this early in the year. Unfortunately that train has left the station long ago for this year.  I will certainly consider this for next year. 
I love your strategy of keeping the stocks separate.  I was assuming the entire market will crash, I have until Oct 15, next year to recharacterize.  But it does not have to be the entire market I suppose.   It is a big hassle to keep multiple accounts though, but its just a spreadsheet to keep track of these.  Also after couple of years, I can combine them I suppose, at that point it cannot be recharacterized.   I also did not realize I can do multiple conversions in 1 year.  I thought there is a limit on number of conversions.   
I see all your points.  If I convert bunch of index funds, do you see any advantage in keeping them separate?  For example, if I have ITOT and VTI, I assume they will go up and down together.  But on the other hand the very fact I have two different funds is to ensure diversification.  In that case separate account does make sense.
Thanks for the wonderful pointers
You are very welcome. Will answer your questions in more detail after the weekend. Have some more comments and suggestions. No time now. On my way to Europe today.
Systems101, I have one additional question.  When I do Roth conversion, will Fidelity let me do in kind transfer?  Or do I need to sell those equities and buy them again in Roth?
(11-28-2018, 02:05 AM)Abe Wrote: Systems101, I have one additional question.  When I do Roth conversion, will Fidelity let me do in kind transfer?  Or do I need to sell those equities and buy them again in Roth?

You can process an in-kind transfer and do it online.  Also think about good growth stocks in your pretax IRA that may be down in price.  Sometimes they make good candidates.
I generally fund my Roth in early January and cover the taxes from my taxable brokerage account.  I make one estimated payment for the first quarter of the year on April 15th to cover the distribution.
You can do in kind transfers. I actually like doing in kind transfers on stocks that may be beaten down, so when the tax comes due, I typically have already made the tax back from my gains on the rebound.
It is NOT the same as leaving it in the traditional IRA because, in a traditional IRA, you are forced to take minimum required distributions! The net result in $ may be the same but if you have a large traditional IRA you may be forced to take more out than you want to.
Please note that that the ability no longer is allowed in the new tax bill.

Forum Jump:

Users browsing this thread: 1 Guest(s)