Trad IRA rollover to Roth with no earned income?

[sornord]

That bothers me. What happens when you have to start taking RMD (Required Minimum Distributions)? The broker would have to allow partial distributions. I suggest you go back to whatever paperwork you got when you opened the account and see if partial distributions are allowed or not.

Probably wasn't clear. The whole $28k would have to be put into the Roth, not the entire Trad IRA holdings.

 

[adjusterjack]

Oh, OK, I misread. I went back to the beginning and saw that you have $70K + in that IRA so you would only be making a partial conversion. Since the trad IRA apparently allows partial distributions why not take $22,000 and make the direct transfer without withholding and if you need money for estimated taxes on that amount you can take additional cash distributions from the IRA to yourself throughout the rest of the year. The end result would be the same. You would be taxed on the $28,000 as ordinary income regardless of how you split it up.

 

[LdiJ]

The brokerage in question is SOFI, and they said they are not equipped "yet" to handle tax withholdings. Though that it implies it will change, it is the first time I've ever encountered that at any brokerage. If they don't withhold taxes...ever...then it looks like I'd be on my own to pay my taxes on any RMD. Beginning to rethink using them for these accounts...They only have my Trad IRA (which has taken significant hits on paper in recent weeks) and a currently-unfunded Roth.

You might want to seriously consider holding off on the Roth Conversion in order to give your Traditional IRA a chance to recover. It should bounce back.

 

[sornord]

You might want to seriously consider holding off on the Roth Conversion in order to give your Traditional IRA a chance to recover. It should bounce back.

Withdrawing now will mean lower taxes on the amount taken out.

 

[FlyingRon]

Withdrawing now will mean lower taxes on the amount taken out.

Precisely. The investment can recover just as well inside the Roth and that recovery won't be taxed to you. If there is a loss involved in the sale, be careful of the wash rule.

 

[sornord]

Oh, OK, I misread. I went back to the beginning and saw that you have $70K + in that IRA so you would only be making a partial conversion. Since the trad IRA apparently allows partial distributions why not take $22,000 and make the direct transfer without withholding and if you need money for estimated taxes on that amount you can take additional cash distributions from the IRA to yourself throughout the rest of the year. The end result would be the same. You would be taxed on the $28,000 as ordinary income regardless of how you split it up.

So, like this?

$22k, with no withholdings, go to the Roth.

Then four $1,500 distributions pulled out (i.e. the ballpark $6k taxes divided by four for estimated tax payments) in the remainder of 2020, again with no withholdings, but each $1,500 goes directly to the IRS?

Total 2020 distribution is still $28k, which would be the figure reported on the 8606 form when I file my 2020 return.

Do I "got it?"

 

[sornord]

Precisely. The investment can recover just as well inside the Roth and that recovery won't be taxed to you. If there is a loss involved in the sale, be careful of the wash rule.

By a loss, you mean the distribution proceeds are lower than my basis? (I'm WELL above the basis. This Trad IRA has been inactive since the mid '80's when my income reached a point where no more deductions were allowed.) Will have to google the wash rule.

 

[FlyingRon]

Yes, the wash rules prohibit you from taking a capital loss if you rebuy the same investment. If there's no capital loss or you reinvest in some other stock, then the wash rule doesn't apply.

 

[adjusterjack]

So, like this?

$22k, with no withholdings, go to the Roth.

Then four $1,500 distributions pulled out (i.e. the ballpark $6k taxes divided by four for estimated tax payments) in the remainder of 2020, again with no withholdings, but each $1,500 goes directly to the IRS?

Total 2020 distribution is still $28k, which would be the figure reported on the 8606 form when I file my 2020 return.

Do I "got it?"

You got it. Except I don't think form 8606 applies to a conversion from a trad IRA to a Roth. From a Simple IRA, yes, but that's not what you have.

Also keep in mind that you can do the direct transfer "in kind" which means that the securities themselves can be moved without selling them and buying them back. You just have to make sure the new broker handles the same securities.

 

[sornord]

You got it. Except I don't think form 8606 applies to a conversion from a trad IRA to a Roth. From a Simple IRA, yes, but that's not what you have.

Also keep in mind that you can do the direct transfer "in kind" which means that the securities themselves can be moved without selling them and buying them back. You just have to make sure the new broker handles the same securities.

Part 1 of the 8606 says "if you took distributions from a traditional, SEP, or SIMPLE IRA" so I think I'm good.

Thank you to all who've replied!

This forum is one of the best I've ever found in all the years since late 1995 when I was first able to go online via a 56k dial-up account via a college in Germany. (Had to use NEWSGROUPS back then. Anyone remember those?)

 

[adjusterjack]

Part 1 of the 8606 says "if you took distributions from a traditional, SEP, or SIMPLE IRA" so I think I'm good.

I see that, but Part I doesn't apply unless you have also made non-deductible contributions. However, Part II does seem to apply.

Hmm, I wonder how long this form has been around. I never used it when I was making my conversions through 2014. Never had any backlash from the IRS.

It looks like I should have used Part III on my 2019 return since I cleared out my Roth to buy a house. Although it only asked for unqualified distributions and mine was qualified so there wouldn't be a taxable amount anyway. Oh, well, water under the bridge. I'll just have to wait and see what happens when the IRS gets around to processing my mailed in return.

 

[adjusterjack]

This forum is one of the best I've ever found in all the years since late 1995 when I was first able to go online via a 56k dial-up account via a college in Germany. (Had to use NEWSGROUPS back then. Anyone remember those?)

I got my first computer in 1992 and I remember when floppy discs were actually floppy (the 5" kind). Then the 1.4 mb disc came out and software came in boxes of multiple discs, sometimes 10 or 15 of them.

 

[davew9128]

I see that, but Part I doesn't apply unless you have also made non-deductible contributions. However, Part II does seem to apply.

Hmm, I wonder how long this form has been around. I never used it when I was making my conversions through 2014. Never had any backlash from the IRS.

It looks like I should have used Part III on my 2019 return since I cleared out my Roth to buy a house. Although it only asked for unqualified distributions and mine was qualified so there wouldn't be a taxable amount anyway. Oh, well, water under the bridge. I'll just have to wait and see what happens when the IRS gets around to processing my mailed in return.

Form 8606 has been around and used since I've been in the business which goes back to the Clinton administration.