DH left his old job and I wanted to get his crappy-performing (pre-tax) 401k out of his old company account and move it to Vanguard.
Did this online and didn’t fully comprehend the recharacterization choices ('cuz it’s hard with DH breathing down my neck asking questions every few seconds about what I’m doing).
So… ended up choosing to recharacterize $520k 401k pre-tax to a Roth IRA (tried reversing and talking to Vanguard to no avail). Our income is $70k.
We’ve finally come to grips with the fact that we’ll just have to pay $$$ taxes for 2020 .
I’ve tried to contact the IRS, but I get stuck in an endless loop of pushing buttons and never get to anyone.
Any idea what the tax amount might be? (30 years of input for the $520k)
And can we use money from the now-Roth IRA to pay that tax?
Here’s a general article that covers much of the ground.
The last tax reform back in 2018 got rid of the option to recharacterize (undo) Roth conversions, so I think they’re irreversible at this point even for qualified plans like 401k. I’m sorry you did this in a rush but I’m afraid you may be stuck with it.
On the bright side, a Roth conversion increases the after-tax value of retirement funds and is a bet on a rising market (which hopefully worked/works out for you), and especially so if you pay taxes due from outside the IRA, which is preferable if possible.
For your expected 2020 taxes, you can plug in your own numbers here and see what the difference is. I get about +$145k extra (vs $2600 total) assuming all of his 401k contributions were deductible or matching (pretax, this is typical; it’s possible for some special situations to have non-deductible traditional 401k contributions but that would be unusual and you’d have had to have gone out of your way to do it). I also didn’t include either state taxes or any special deductions.
I wouldn’t bother trying to talk to the IRS, just post your questions here. They’re not going to be super helpful in this situation I don’t think.
As for using your now-Roth funds to pay part of the tax, this depends on several factors but most importantly-
How old is DH now? Is he 60 yet, older, or younger?
When was the Roth IRA that you moved the 401k funds into first opened? Was it new and just opened to receive this transfer/conversion, or had it been around for some time with prior Roth contributions in it? There’s a “5 year rule” that can apply.
I can give better advice if you answer these questions, but broadly, do you have an extra $150k of taxable savings you could tap to pay these taxes if you needed to? That would likely be better than cashing out part of the retirement account to pay the taxes, and if there would be tax penalties involved, that would be true only moreso.
There’s also a covid relief provision which makes it easier and less painful to take out funds from your IRA, but it would have to be done before end of year. See the IRS FAQ Q5-7
But basically if you claim covid hardship, which I’m sure no one is checking, you can take out $100k from your IRA without early withdrawal penalties (if any applies to your situation) and in addition, you can pay back the funds into the IRA if you do so within the next 3 years. Ideally this gives you a bit of extra time to save up taxable funds to meet this years tax hit if necessary. It looks like most of these rules are written with pretax plans in mind rather than Roth, so it might be good to double check that if you think you’ll need the withdrawal liquidity to pay your taxes.
If you want to get a second and third opinion, just in case I might have missed something, it couldn’t hurt to post your questions on these two boards.
I would do this now/promptly, since even though I think there’s not much you can do, if there is a way to undo it, you may need to act before the new year and it’s a busy week for IRA departments with last minute IRA distributions and such. If you do, please post links to your threads and I’ll be interested in the answers and may be able to comment on which posters there are reliable.
DH is 56, will probably retire at 65.
401k is about 30 years old, fully vested.
His elderly parents each have $$; at my best guess, I think he’ll get at $150k from his mom (probably will live another 5+ years) and $200-250k from his dad (hopefully the ol’ bastard will kick off within the next year or two).
I told DH to get an advance from his dad’s inheritance. FIL has some dementia and is in a nursing home, older BIL has “control” over the funds (family business that DH was not a part of).
DH also has a $105k regular mutual fund, but he doesn’t want to touch that.
(FWIW, DH & I are not divorced but separated 3 years ago. His old 401k had a measly 3.1% ten-year performance, while each of our (separate) Vanguard accounts have 13% performance for the same time.) I should also add that DH has never done finances, he doesn’t understand them (or technology).
Thank you so much for the answers… I’ll be reading the articles later today.
Sounds like you have the resources to pay the taxes if you need to from a few places, so that’s good.
how old is the Roth IRA account, the one that you moved the 401k funds into? Since DH is under 60, there would potentially be penalties (absent the covid relief I mentioned) for taking Roth funds out in the near term, again, depending on the details.