TIRA to Roth “income” & taxation

Submitted by Ron Corcoran on Thu, 2021-11-04 13:10

Conversions add to annual income. Income is therefore “irregular” and this leads to the IRS 2210 to reduce or eliminate penalty if taxes paid-in (est + w/h) are also irregular.

The 2210 is complex and allows the lesser of: a percentage of last year’s or current year’s taxes due in 25% “quarters”. My problem or question is that one has to have paid in 90% of the 1st half of the year to cover the 1st 5 months of the year! I’m just above threshold, an increase of my conversion will trigger a penalty for quarters that already past. Am I missing something or poor planning? Previous reply that this is safe harbor and has nothing to do with taxes due was not helpful. The 2210 is real & does trigger penalty ! I’m definitely interested in learning.
Thanks, Ron



Submitted by Alan - IRA critic on Thu, 2021-11-04 17:42

If you meet a safe harbor, there is no penalty regardless of how much you owe in April. The most used safe harbor is 100% of prior year tax liability (110% if your prior year tax liability exceeded 150k, joint return or single). The other safe harbor is 90% of the current year tax liability. SInce conversions increase current year tax liability, those who convert will most often use the prior year tax liability as the safe harbor. And in both cases, estimated taxes must be paid in equal amount on the quarterly due dates. If you don’t, even though you may make up the shortfall in the later quarters, you may still owe a penalty for the earlier quarters. The IRS assumes your taxable income is generated evenly throughout the year.
For those generating most of their income (conversions or other income) in the later quarters of the year that do not meet one of the two safe harbors, the hated and complex 2210 AI form can be filed and the IRS will then base any penalty on the actual shortfall. So if no shortfall in the earlier quarters because taxable income was limited in those quarters, there will be no penalty generated. Therefore the 2210 AI will only reduce your penalty if your income is back loaded. If you did a large conversion early in the year, the 2210 will not reduce your penalty.
If you pay by withholding rather than quarterly estimates, the withholding is deemed to have been paid equally throughout the year. So even if you had no withholding until Dec, it would be treated as paid 25% for each quarter. You could also combine withholding with quarterly estimates to reduce the exposure of paying estimates late (back loaded). 
Of course, with today’s very low interest rates, underpayment penalties do not amount to much unless you are talking about very large underpayments. This will be a larger issue once interest rates rise to normal levels.

Submitted by Ron Corcoran on Thu, 2021-11-04 22:40

I had an early distribution this year and late-year conversions in the past. I generally make estimated payments that are sufficient for the period but have not been equal. Ironically I have paid more than the sum of the est tax coupons provided from last yr taxes. My error IS small & would go away if I could apply 50% of annual w/h to period b (ending May31). I thought I needed to use 5/12 of withholding to deliniate what was paid-in by May31. Can I actually use 25% of withholding for each period ??  I know the penalty would be small and may actually be better than limiting my conversion. I’d rather not raise flags or make errors if I can avoid same. Please follow-up. Thanks, Ron

Submitted by David Mertz on Thu, 2021-11-04 23:36

The tax code and the instructions for Form 2210 permit you to treat tax withholding as either paid equally in each tax period or when actually paid.
In another thread you mentioned using TurboTax.  As far as I know, TurboTax automatically divides withholding equally among the tax periods and requires overrides to do otherwise.   Estimated tax payments (with are different from withholding) must always be treated as paid when paid.

Submitted by Ron Corcoran on Fri, 2021-11-05 00:25

To enter taxes when actually paid (or similar language) but I think I’ve had to on behalf of the irregular estimated tax payments. Using 25% w/h for each period along with actual estimated tax payments (for ea period) would help me. I’ll have to reread Instr for 2210.. I found instr for reg method that allows equal (25%) application of withhold while est taxes are applied when paid.

Submitted by Ron Corcoran on Fri, 2021-11-05 13:34

You nailed it .. by applying 25% of whole year withhold to each period, my issue (albeit small) is resolved and I can now increase my conversion to Roth without aquiring a (small) mid-year underpayment penalty :).Thank You ! 

Submitted by David Mertz on Fri, 2021-11-05 20:22

If you allocate 25% of your tax withholding to each tax period and to avoid an early quarter underpayment would need to have additional withholding, you could convert some portion to Roth indirectly by having some withheld for taxes and then complete the conversion of the amount withheld by substituting other funds within 60 days.

Submitted by Ron Corcoran on Tue, 2021-11-09 15:02

If I could get Vanguard to w/h taxes on upcoming qualified dividends, but that didn’t work. Oddly that same stock was unqualified in Q1 and previous “transfer agent” w/h.. I had no choice there either. Your idea sounds better. Being in CT, they’ll piggyback the Fed and take another 6.99%. I hate to use IRA money for taxes but, maybe in this case, a limited amount makes sense. I am left struggling with original prob too .. since currently I can’t level-load w/h without a Q1 underpayment, but it fixes Q2 & Q3. So, I go back to choosing “when actually w/h” but Q2 is an issue because it’s only 2 months. I don’t have enough w/h to satisfy 25% of my 90% projected income that is still evenly distributed for each “qtr”. I wonder why I couldn’t include 1/2 of June since 6-15 is the cut -off .. but my income is monthly .. had it been weekly ? Doing same for Q3 with 1/2 of Sept. OR, is the income also spread “as I receive it” ??  I concede that the only real option may be to do two conversions, one a calculated amount with taxes withheld, to back-fill early quarters and another to hit my goal. Please Advise. Thanks, Ron

Submitted by Ron Corcoran on Tue, 2021-11-09 18:29

I can replace the amount held by w/h with other funds (eg bank account) so the amount getting to Roth is not diminished ? That would be perfect ! Hopefully I can do with Vanguard.

Submitted by David Mertz on Tue, 2021-11-09 21:53

Yes, you have 60 days from the date of the distribution from the TIRA to complete the conversion contribution of the amount withheld for taxes by substituting other funds.

Submitted by Ron Corcoran on Sat, 2021-11-13 19:30

I figured out how much I’d like to w/h and plan to do three (3) transactions; 1st conversion with taxes withheld.. 2nd indirect r/o equal to w/h amount 3rd conversion w/o w/h to hit goal … Then pay req’d EST taxes when due. I assume there is no limit as to the number of conversions one can do ? Please Advise & Thanks for previous suggestion (to add withholding)   

Submitted by David Mertz on Mon, 2021-11-15 03:50

Correct, no limit on the number of conversions.

Submitted by Ron Corcoran on Mon, 2021-11-15 23:11

with extra withholding with the idea that I could now do another Roth contribution to equal that withholding. Vanguard said I can only do this once every 365 days so I now ask you if I’m still eligible because … In March I did a lump sum distribution of my 401ks (2) and one of them made me take the after tax contribution money and do an indirect transfer to get it to the Roth. I read the 60-day rule says you  “can’t rollover any distributions from either the distributing or receiving  IRA for a year”. Still confused, please advise. 

Submitted by Alan - IRA critic on Tue, 2021-11-16 01:03

Your last quote correctly describes the limits for IRA to IRA rollovers. But your prior distribution was from a 401k, not an IRA, and the rollover limit does not apply to 401k distributions. Therefore, you can ignore the March transaction.

Submitted by Ron Corcoran on Tue, 2021-11-16 02:07

I assume that quote only pertains to indirect (aka 60-day) conversions. I plan to transfer (from other sources) an amount equal to taxes withheld for both federal and state income taxes.Can I still do additional conversions from IRA to Roth as long as they are not indirect (60-day) ? I plan to do one more “direct” by year end.  

Submitted by David Mertz on Tue, 2021-11-16 03:47

Roth conversions are disregarded with respect to the one-rollover-per-365-days rule.  That rule applies only to 60-day TIRA-to-TIRA and Roth IRA-to-Roth IRA rollovers.  Perhaps the Vanguard person thought you would be doing a Roth IRA-to-Roth IRA rollover; you are not.
Your contribution equal to the withholding is a Roth conversion contribution, not a regular contribution or a rollover contribution.  The receiving custodian must record it as a conversion contribution.

Submitted by Ron Corcoran on Tue, 2021-11-16 18:29

I am retired so not sure I can do any contribution. No options on-line to specify conversion-contribution and support staff say I can’t do this even after consulting with supervisor. The closest thing I can do (on-line) is to check rollover from another Roth and move $ from bank to Roth .. but the coding will be all wrong. I hope to speak with supervisor directly and hopefully convince them that this is legit. They say I could only put my aftertax $ back into the TIRA. I just want to add to Roth the amount that never got there due to the W/H. Any thoughts on what I can say to help convince ?   Thank You

Submitted by David Mertz on Wed, 2021-11-17 02:44

Most of my experience is with Fidelity and Ascensus forms.  Fidelity’s deposit form has a “Roth Conversion” box to mark to indicate such a deposit.  Similar to Fidelity’s form, forms provided by Ascensus have a box to mark to indicate that the deposit is a Roth conversion.  It appears that Vanguard’s forms are not accessible without logging on, so I have no idea if Vanguard’s form has a similar box.
Perhaps Vanguard simply chooses not to accept cash Roth conversion contributions (seems unlikely) or they just don’t permit it to be done online.  Fidelity requires mailing a check with the deposit form.
By marking the Conversion box on the deposit form, the financial institution is instructed to report the amount as a “Roth IRA conversion amount” in box 3 of Form 5498 and not in box 1 as a regular contribution or in box 2 as a rollover contribution.
If Vanguard continues to be uncooperative, you can always open a Roth IRA elsewhere to receive the conversion contribution.

Submitted by Ron Corcoran on Thu, 2021-11-18 01:00

Their process is on-line or with their assistance on the phone. They seem confident about 5498 bx 3 .. guess I won’t know for sure until next May !They suggest I recheck that the 365 day rule for 60-day indirect won’t be an issue for me since I did a 401k after tax contribution indirect r/o in spring. Told him I beleive this only applies to TIRA-to-Tira & Roth-to-Roth (indirects). If I could get that reaffirmed here, that would be great. I SO appreciate the info I’ve gotten on this forum !  Thank You !

Submitted by David Mertz on Thu, 2021-11-18 06:02

Correct.  An indirect rollover from a 401(k) is disregarded with respect to the one-rollover-per-365-days limitation.

Submitted by Ron Corcoran on Thu, 2021-11-18 13:43

I see the IRS ruling is for IRAs so guess that’s how 401k are disregarded.I see examples of indirect r/o where amount withheld can be converted to Roth from other funds but none of these elude to what I am doing .. a partial direct and partial indirect r/o to replace withholdings .. hope I’ll be ok.Please don’t take this the wrong way .. and I know this is free help .. are you folks CPAs or otherwise qualified to say what you do ? I’m sure you are correct but does someone oversee the dialog and chime in if wrongful advice is inadvertantly given ? (just curious)

Submitted by David Mertz on Fri, 2021-11-19 16:48

Those here who respond the most tend to be individuals such as myself who simply have an interest in understanding the complexities of the tax code with respect to retirement accounts and probably have a better understanding than most CPAs who tend not to specialize in a particular area of the tax code  We study the relevant tax code sections,  IRS publications, forms and instructions, as well as Private Letter Rulings issued by the IRS.  We generally read each other’s posts and will reply if something doesn’t seem right.  Nothing here can be construed to be legal advice.  However, a well-known attorney who is an industry-recognized expert in the area of retirement accounts, Natalie Choate, has mentioned in her book and other publications the technique of manufacturing tax withholding by taking a distribution from an IRA, having taxes withheld, then rolling over the gross amount of the distribution.  Since a Roth conversion is treated as a rollover (but disregarded with respect to the one-rollover-per-12-months limitation), the same applies to a conversion from a traditional IRA to a Roth IRA.
Note that CFR 1.408A-4 Q&A-1(c) effectively says that the conversion is treated the same whether direct or indirect:  https://www.law.cornell.edu/cfr/text/26/1.408A-4
If you still have concerns about part being a direct, in-institution conversion and part being indirect, you could do the whole thing indirectly.  Technically you could also to it with two separate distribution requests, but often a financial institution will not permit 100% of a distribution to be withheld for taxes (although I don’t know why they have such a limitation; there is nothing in the tax code that precludes having 100% of a distribution withheld for taxes).

Submitted by Ron Corcoran on Sat, 2021-11-20 02:19

Thank you for that explanation and your assistance. It’s wonderful. I did the directon VG site with w/h and now comfortable going fwd with indirect to equal w/h. I am a bit worried about 5498 coding being proper & hope VG gets it right. I’m sure I’ll be back, hopefully on a different topic. Thanks Again 

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