Did my Roth rollover today!

[KTP]

Yay! We are now in the elite Roth owners club. I made a $5000 non-deductable traditional IRA contribution for my dw in december into a Vanguard account and made another $5000 contribution Jan 4. I just rolled over the $10,000.31 to a new Roth IRA for her. I suppose we owe some tax on the $0.31 it made in the traditional IRA in december...what a pain

[Downfall]

Congrats! I'm planning on doing the same thing soon. How easy/painless was it?

And hey, the 31 cents gets favorable tax treatment, right? .

[disneysteve]

Congrats.

As for the $0.31, I don't believe you'll actually have to report that because at tax time, amount under $0.50 get rounded to zero.

[KTP]

Easy. It took about 3 minutes on the Vanguard site to open a new Roth account and then choose the Exchange option from her traditional IRA account I had set up there. I chose the "don't withhold any tax" option since I was unsure if they would try and withhold from the traditional IRA we had funded with already taxed monies. She doesn't have any other IRA so the only tax due should be on the $0.31. I will mail them a dime at some point.

I put it in a global international Vanguard growth fund. Probably better not to look at this volatile type of investment for awhile

[Thrif-t]

Hey thanks for this post I need to do this. I have an IRA w/Vanguard so you are saying I can just do an exchange into a Roth. But what about the withheld taxes, I can have them withhold from the exchange so the amount going into the Roth will be lower then the original? Do I have that right? But haven't I read that you shouldn't do that for one reaon or another, is it better to just pay at tax time? One more question if I do this conversion does this mean I can't add another 5k in my roth for this year?? Thanks for all and any help.

[KTP]

We didn't owe any taxes on the conversion because I had just deposited the $5000 + $5000 in a non-deductable vanguard IRA money market in dec 2009 and jan 2010. So I just selected exchange from the IRA and selected "don't withhold taxes".

If you have gains in a IRA or you have a deductable IRA where you made pre tax contributions, you will owe taxes. If you take them from the IRA itself to pay the taxes you may owe a penalty too. Better to pay them from other funds, you can spread this out over a couple years i think.

And yes, you can still do the Roth 5000 contribution if you don't make over $160K filing jointly.

[Thrif-t]

We didn't owe any taxes on the conversion because I had just deposited the $5000 + $5000 in a non-deductable vanguard IRA money market in dec 2009 and jan 2010. So I just selected exchange from the IRA and selected "don't withhold taxes".

If you have gains in a IRA or you have a deductable IRA where you made pre tax contributions, you will owe taxes. If you take them from the IRA itself to pay the taxes you may owe a penalty too. Better to pay them from other funds, you can spread this out over a couple years i think.

And yes, you can still do the Roth 5000 contribution if you don't make over $160K filing jointly.

My IRA was a rollover from a past employers 401K plan, so I owe the tax but it's worth less now then when I first opened it, so less tax I guess. And I think i'm interpreting what you're saying that I should not have the taxes withheld from the exchange and just pay when I file my taxes rigt? Now you got me all confused with this talk of penaties.ha

[KTP]

it is just that you have to pay 10% if you withdraw from it before you are old.

So if you roll over 10,000 but use 2000 of it to pay taxes, you have to pay a $200 penalty unless you have a lot of ear and nose hair.

[disneysteve]

Hey thanks for this post I need to do this. I have an IRA w/Vanguard so you are saying I can just do an exchange into a Roth. But what about the withheld taxes, I can have them withhold from the exchange so the amount going into the Roth will be lower then the original? Do I have that right? But haven't I read that you shouldn't do that for one reaon or another, is it better to just pay at tax time? One more question if I do this conversion does this mean I can't add another 5k in my roth for this year?? Thanks for all and any help.

You should not convert a traditional IRA to a Roth if you can not afford to pay the taxes without dipping into the account itself. There are penalties for doing so that make it not worth doing.

Rollovers and conversions are separate from annual contributions, so you can do a conversion and still make your regular annual contribution assuming you meet the requirements.

[Thrif-t]

You should not convert a traditional IRA to a Roth if you can not afford to pay the taxes without dipping into the account itself. There are penalties for doing so that make it not worth doing.

Rollovers and conversions are separate from annual contributions, so you can do a conversion and still make your regular annual contribution assuming you meet the requirements.

Ok I knew there was a reason you were not to do it that way. Thank you. And sorry if this is dumb, but the way I pay taxes on it is that it will be added to my 2010 taxes as income? right? But I have 2 years to pay them right? Just want to make sure I have all my ducks in a row.

[disneysteve]

And sorry if this is dumb, but the way I pay taxes on it is that it will be added to my 2010 taxes as income? right? But I have 2 years to pay them right? Just want to make sure I have all my ducks in a row.

Yes, it counts as income but can be paid over 2 years.

[puck36]

I have a few questions about this. I have about $6,000 in an IRA that I want to convert to a Roth IRA.
1. When do I pay the taxes?
2. Do I pay the taxes on the tax return for 2011 & 2012?
3. Does the taxes come out of the Roth?

[disneysteve]

I have a few questions about this. I have about $6,000 in an IRA that I want to convert to a Roth IRA.
1. When do I pay the taxes?
2. Do I pay the taxes on the tax return for 2011 & 2012?
3. Does the taxes come out of the Roth?

The conversion will count as income for 2010 so it will get reported on your 2010 and 2011 returns.

As noted above, you should NOT pay the taxes out of the Roth account due to the penalty you'll get hit with. You need to pay the tax out of other funds. If you can't afford to do that, you should not do the conversion.

[puck36]

ok but when do I need to pay the taxes? Can I pay the taxes anytime or when I convert the IRA?