Personal Finance (Not Investing) • Using withholding on Roth conversion instead of estimated tax payment

I've done this exact thing or a close variation Stinky wants to do maybe 50 times over the past years at both Fidelity and Schwab.

The 1099's from both brokers were always correct. Only one 1099 was issued from each broker, summing all the transactions from that tax year.

Mechanically, it works like this...

For the indirect tIRA->Roth conversion...you take a distribution from your tIRA and have the funds deposited into a taxable account. In my case, I've sent it to my taxable brokerage account or working checking account. In that distribution, I have taxes withheld for Fed and State.

The next day (you have up to 60 days), I call up the Fidelity or Schwab and tell them I want to do a rollover, for the entire amount of the distribution, using these words: "the Rollover funds are in my brokerage account and it should be coded as a 20XX Rollover". At Schwab the transaction will appear as "IRA ROLLOVER CONTRIB" in the History. At Fidelity, it appears as "ROLLOVER CASH".

A variation of this I have done is pay taxes during a tIRA->Roth conversion, as the taxes qualify as withholding and have better treatment relative to estimated tax payments. In this case, I do a tIRA-Roth conversion and have taxes withheld for Fed and State. I don't actually take possession of the conversion money in a taxable account.

The next day (you have up to 60 days), I call up the Fidelity or Schwab and tell them I want to do a rollover, for the amount of the taxes withheld using these words: "the Rollover funds are in my brokerage account and it should be coded as a 20XX Rollover". At Schwab the transaction will appear as "IRA ROLLOVER CONTRIB" in the History. At Fidelity, it appears as "ROLLOVER CASH".

Now, at both Fidelity and Schwab, you will run into phone reps that are not familiar with this and will tell you that you cannot do more than one indirect tIRA->Roth conversion in 12 months. This is not true of this conversion. If you think about it, the Treasury is getting their tax money now and they are happy to do so. When this happens, I tell them to go look at a historical transaction I did and code it the same way. Sometimes I just tell them to send me to the Retirement Desk and have that phone rep do it. I've had at least one Retirement Desk phone rep not know. In all cases, it has worked out and I never had to have a reissued 1099 or any other gyrations.

This is also a useful chart from the IRS:
https://www.irs.gov/pub/irs-tege/rollover_chart.pdf

I am planning to do this at Fidelity.
I believe I can do this with 0 human interactions with the following actions:
- Direct tIRA->Roth IRA rollover (in-kind) throughout the year for whatever amounts. I can do this online.
- In Dec. do a tIRA->Brokerage distribution and manually apply up to 99% withholding--this amount will need to be enough to cover all the taxes of my Roth conversions (and any other cap gains/dividends--in future years if I'm not doing Roth conversions I'll need to remember to make estimated tax payments). I checked and it appears I can do this online as well.
- Write a check to myself from the brokerage account for the full amount of the Dec. distribution and deposit it into the Roth IRA via the mobile app, marking it as a 60 day rollover (the app does have a selection for this I checked).

I can wait to do that last step until 2025 (so long as its within 60 days of the distribution) if I want to for cash flow or tax management.

I did see where the mobile app deposit seems to have this capability. I never tired it. You night try a test one first for some small amount. Check and see if it shows up in the Activity History as "ROLLOVER CASH". Would be great if you can update this thread with your results.

Statistics: Posted by Morik — Wed Mar 06, 2024 2:31 am — Replies 59 — Views 3375