AKB: Tax Question

[Op2]

I did a rollover (near the end of 2024) from traditional into Roth in my 403(b). The idea was, take out 100% of X while putting 75% into Roth fro retirement with the other 25% going to the government to pay tax on it. TIAA ensured me it would work fine.

So then I see transaction on the TIAA website and it says 100% rollover into Roth, 0% into tax for the Feds. So I call TIAA to inquire and they say, actually we can't take tax out for you. Okay, but it wouldn't been nice if they told me that at the time. But anyway, I'll now have to take some other money out of my Roth retirement to pay the tax on it, which I will be able to do in a couple days.

So here is the question. Can I wait until March when I do my taxes for 2024 and send in the tax money with the return? Or should I send a check to the Feds as soon as TIAA puts my Roth withdrawal in my bank account in a few days? And if it's the latter, how do I do it? Via quarterly estimated tax? I didn't do any of that in 2024 because I wasn't planning on having any big chunks of untaxed income, until TIAA botched my rollover.

Any help is appreciated. TIA.

 

[BW Lion]

I did a rollover (near the end of 2024) from traditional into Roth in my 403(b). The idea was, take out 100% of X while putting 75% into Roth fro retirement with the other 25% going to the government to pay tax on it. TIAA ensured me it would work fine.

So then I see transaction on the TIAA website and it says 100% rollover into Roth, 0% into tax for the Feds. So I call TIAA to inquire and they say, actually we can't take tax out for you. Okay, but it wouldn't been nice if they told me that at the time. But anyway, I'll now have to take some other money out of my Roth retirement to pay the tax on it, which I will be able to do in a couple days.

So here is the question. Can I wait until March when I do my taxes for 2024 and send in the tax money with the return? Or should I send a check to the Feds as soon as TIAA puts my Roth withdrawal in my bank account in a few days? And if it's the latter, how do I do it? Via quarterly estimated tax? I didn't do any of that in 2024 because I wasn't planning on having any big chunks of untaxed income, until TIAA botched my rollover.

Any help is appreciated. TIA.

Can I wait until March when I do my taxes for 2024 and send in the tax money with the return?
You could, but you might also get assessed a late payment penalty for not paying enough taxes during the 2024 tax year. Sufficient estimated 2024 taxes must be paid by January 15, 2025. Instead of sending a paper check to the IRS, I highly recommend that you use the IRS' "Direct Pay" website and have the funds paid directly from either your savings or checking account. It's (a) faster, (b) safer and (c) you get a printable receipt showing that you paid on time.

As you probably know, the transfer from a Traditional IRA into a Roth IRA is subject to taxation unless you had sufficient "basis" in the Traditional IRA. Did you ever contribute money to your Traditional IRA for which you didn't declare tax deductibility in the year of contribution? Such funds would be considered as "cost basis" and would reduce the amount of IRA transfer subject to 2024 taxation.

 

[Op2]

Can I wait until March when I do my taxes for 2024 and send in the tax money with the return?
You could, but you might also get assessed a late payment penalty for not paying enough taxes during the 2024 tax year. Sufficient estimated 2024 taxes must be paid by January 15, 2025. Instead of sending a paper check to the IRS, I highly recommend that you use the IRS' "Direct Pay" website and have the funds paid directly from either your savings or checking account. It's (a) faster, (b) safer and (c) you get a printable receipt showing that you paid on time.

As you probably know, the transfer from a Traditional IRA into a Roth IRA is subject to taxation unless you had sufficient "basis" in the Traditional IRA. Did you ever contribute money to your Traditional IRA for which you didn't declare tax deductibility in the year of contribution? Such funds would be considered as "cost basis" and would reduce the amount of IRA transfer subject to 2024 taxation.

Thanks for the info. I didn't know about IRS Direct Pay. I'll check it out.

I'm not sure what you mean by the second paragraph but all of my Traditional contributions (and these are Traditional 403(b) rather than Traditional IRA, in case that matters) were made through my employer and were official and all that stuff, so I think I'm good on that.

 

[PurposePitch]

I did a rollover (near the end of 2024) from traditional into Roth in my 403(b). The idea was, take out 100% of X while putting 75% into Roth fro retirement with the other 25% going to the government to pay tax on it. TIAA ensured me it would work fine.

So then I see transaction on the TIAA website and it says 100% rollover into Roth, 0% into tax for the Feds. So I call TIAA to inquire and they say, actually we can't take tax out for you. Okay, but it wouldn't been nice if they told me that at the time. But anyway, I'll now have to take some other money out of my Roth retirement to pay the tax on it, which I will be able to do in a couple days.

So here is the question. Can I wait until March when I do my taxes for 2024 and send in the tax money with the return? Or should I send a check to the Feds as soon as TIAA puts my Roth withdrawal in my bank account in a few days? And if it's the latter, how do I do it? Via quarterly estimated tax? I didn't do any of that in 2024 because I wasn't planning on having any big chunks of untaxed income, until TIAA botched my rollover.

Any help is appreciated. TIA.

Ignore BW ... with Roth conversions, you can pay the tax when your normal tax return is filed - it'll be added into your ordinary income. Don't worry about Direct Pay. There's no estimated tax here, unless you, for some reason, want to pay the IRS early (and there's zero requirement or expectation to do so). I'm not sure why you're referencing 25% - that's not a tax bracket.

--------------------
Marginal rates: For tax year 2024, the top tax rate remains 37% for individual single taxpayers with incomes greater than $609,350 ($731,200 for married couples filing jointly).
The other rates are:

35% for incomes over $243,725 ($487,450 for married couples filing jointly)
32% for incomes over $191,950 ($383,900 for married couples filing jointly)
24% for incomes over $100,525 ($201,050 for married couples filing jointly)
22% for incomes over $47,150 ($94,300 for married couples filing jointly)
12% for incomes over $11,600 ($23,200 for married couples filing jointly)

--------------------

I don't know in which brackets this money will be taxed, but you obviously have to figure that out (roughly - so, for example ... half in 24%, half in 32% after doing an early dry run of your normal tax liability comp) to know how much to pull out to cover your tax liability, if it's being paid solely from these funds.

 

[Op2]

24% is the tax bracket but to use easy numbers and get close, I planned to rollover 3/4 (75%) and pay tax on 1/4 (25%).

Let me be clear. I rolled over some Traditional 403(b) to Roth in Dec 2024, expecting TIAA to send 1/4 to the Feds, but TIAA didn't do it. I talked to TIAA today and they said I'll get a 1099 at the end of January that lists the total amount rolled into Roth (which will be 88 K) and the total amount I will soon withdraw from a pre-existing Roth (which will be 22 K).

If I can wait until I do my taxes in March then I think I will (a) have a 22 K tax bill on that 88 K I rolled over and (b) will have the 22 K on hand to pay it because I will be drawing that from my pre-existing Roth. If I can do that then fine.

But what I want to MAKE SURE does not happen is that I rollover the 88 K into Roth in Dec 2024 and then not pay tax on it until I do my 2024 taxes in Mar 2025 and then have the Feds come to me and say "You had 88 K in taxable income due in Q4 2024 quarterly taxes and you did not pay it, thus you're penalized."

 

[PurposePitch]

24% is the tax bracket but to use easy numbers and get close, I planned to rollover 3/4 (75%) and pay tax on 1/4 (25%).

Let me be clear. I rolled over some Traditional 403(b) to Roth in Dec 2024, expecting TIAA to send 1/4 to the Feds, but TIAA didn't do it. I talked to TIAA today and they said I'll get a 1099 at the end of January that lists the total amount rolled into Roth (which will be 88 K) and the total amount I will soon withdraw from a pre-existing Roth (which will be 22 K).

If I can wait until I do my taxes in March then I think I will (a) have a 22 K tax bill on that 88 K I rolled over and (b) will have the 22 K on hand to pay it because I will be drawing that from my pre-existing Roth. If I can do that then fine.

But what I want to MAKE SURE does not happen is that I rollover the 88 K into Roth in Dec 2024 and then not pay tax on it until I do my 2024 taxes in Mar 2025 and then have the Feds come to me and say "You had 88 K in taxable income due in Q4 2024 quarterly taxes and you did not pay it, thus you're penalized."

You were already clear. The only way they would have withheld taxes on this rollover is if it was an indirect rollover. It wasn't. They didn't.

You can be entirely sure there is no expectation or requirement that you should pay estimated or quarterly taxes on the rollover amount. Any resultant tax liability from a taxable rollover gets settled up when you file your annual tax return. Relax.

 

[Op2]

You were already clear. The only way they would have withheld taxes on this rollover is if it was an indirect rollover. It wasn't. They didn't.

You can be entirely sure there is no expectation or requirement that you should pay estimated or quarterly taxes on the rollover amount. Any resultant tax liability from a taxable rollover gets settled up when you file your annual tax return. Relax.

Okay, thanks, that's good to know. Here is the next question. Would that also hold even if I did the rollover into a Roth early in the year? To use the same numbers, if I did a 88 K rollover into Roth early in 2025, could I get away with not paying the 22 K in taxes until March 2026 when I did my 2025 taxes? Although that would be nice for me, it really doesn't seem fair to the government. Like I say, I definitely don't want to break any rules. I've never had any tangles with the legal system and I never want to.

 

[PurposePitch]

Okay, thanks, that's good to know. Here is the next question. Would that also hold even if I did the rollover into a Roth early in the year? To use the same numbers, if I did a 88 K rollover into Roth early in 2025, could I get away with not paying the 22 K in taxes until March 2026 when I did my 2025 taxes? Although that would be nice for me, it really doesn't seem fair to the government. Like I say, I definitely don't want to break any rules. I've never had any tangles with the legal system and I never want to.

Yes.

You can always send in estimated payments for your taxes (no matter the source of the prospective liability), but unless it's required, or you're absolute trash with budgeting, you should obviously never do that (it's lending the government money you could be putting to good use in the interim).

 

[BW Lion]

this article captures your situation perfectly.

Tax Withholding and Roth Conversions - Pentegra Retirement Services

A recent call with a financial advisor in Ohio who works with Pentegra is representative of a common question on tax withholding as it relates to retirement accounts. A client of the advisor executed a large Roth conversion in the fourth quarter of last year and […]

pentegra.com

 

[DELion]

I did a rollover (near the end of 2024) from traditional into Roth in my 403(b). The idea was, take out 100% of X while putting 75% into Roth fro retirement with the other 25% going to the government to pay tax on it. TIAA ensured me it would work fine.

So then I see transaction on the TIAA website and it says 100% rollover into Roth, 0% into tax for the Feds. So I call TIAA to inquire and they say, actually we can't take tax out for you. Okay, but it wouldn't been nice if they told me that at the time. But anyway, I'll now have to take some other money out of my Roth retirement to pay the tax on it, which I will be able to do in a couple days.

So here is the question. Can I wait until March when I do my taxes for 2024 and send in the tax money with the return? Or should I send a check to the Feds as soon as TIAA puts my Roth withdrawal in my bank account in a few days? And if it's the latter, how do I do it? Via quarterly estimated tax? I didn't do any of that in 2024 because I wasn't planning on having any big chunks of untaxed income, until TIAA botched my rollover.

Any help is appreciated. TIA.

I am not a CPA but here's how I dealt with my Roth conversion in late 2024:

I had Merrill Lynch do an in-plan transfer from my 401K to a Roth 401K. Like you, they told me they could not withhold taxes on the withdrawal. The best scenario is to pay the tax out of cash available if you have it. I did not so I then did a second 401K withdrawal in late 2024 to use to pay my estimated taxes. Keep in mind you will also need to pay tax on the withdrawal you use to cover your conversion tax so there is a bit of "chasing your tail" effect here.

Then I filed an estimated federal tax payment in late 2024 (which technically was not due until January 15, 2025) to cover the taxes on both withdrawals. I also filed an estimated tax payment in late 2024 with the state of Delaware to cover the state taxes. There are a couple safe harbor rules to review to determine whether you need to pay estimated taxes or not. Keep in mind that the IRS assumes all your income is received uniformly throughout the year. With a late-year Roth conversion, income is not uniform. The IRS allows an Annualized Income Installment Method (see Form 2210) to help with this. I am still not 100% sure I handled this optimally but I decided to play it safe and do the estimated payments since this was my first Roth conversion. I'll have to sort out the tax situation when I file my 2024 taxes.

If you are Medicare-eligible, another important consideration is the impact of the retirement plan withdrawals on your Medicare premium. The Medicare premium is based on income for the previous 2 years. So you may end up with a higher Medicare premium as a result of doing the Roth conversion.

Roth conversions are not simple. Here is a YouTube video on the topic that I found useful: Roth Conversion Tax Payment Video

And here is an article by a CPA on estimated tax payments for Roth Conversions: Estimated Taxes on Roth Conversions

 

[PurposePitch]

And, if there's any insanity from anyone, you file a 2210 and that puts the kibosh on any shenanigans.

 

[Kasparaitis]

Okay, thanks, that's good to know. Here is the next question. Would that also hold even if I did the rollover into a Roth early in the year? To use the same numbers, if I did a 88 K rollover into Roth early in 2025, could I get away with not paying the 22 K in taxes until March 2026 when I did my 2025 taxes? Although that would be nice for me, it really doesn't seem fair to the government. Like I say, I definitely don't want to break any rules. I've never had any tangles with the legal system and I never want to.

OP2., I am a CPA and the article that BW Lion linked and the information that DELion provided is good information that should guide your strategy. Apparently there is an Ignored Member also replying and if it is who I think it is I would recommend you ignore him also. He is a loudmouth know-it-all who actually doesn’t know half of what he thinks he knows. In fact I am sure after the correct information was provided to you he likely scrambled to backtrack and pretend he didn’t say what he really said in an effort to save face. Roth conversions at all but the higher tax brackets are usually the way to go. Also being fair to the government should not enter into your calculus. Your only obligation is to follow the law in a reasonable fashion. Good luck!