Roth conversion order cancellation (1st post)

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myuniquename
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Joined: Mon Apr 05, 2021 11:13 am

Roth conversion order cancellation (1st post)

Post by myuniquename »

TLDR - help

I was doing some financial planning this weekend and wanted to make sure I got some IRA contributions in 2020. I already am maxing out my 401k contributions. Well, I (ignorantly/naively) decided I should convert the small Vanguard IRA I hold with non-deductible contributions to a Roth since the money was already taxed. I say it was naive or ignorant because I also have another very large (to me) Vanguard IRA and I didn’t realize those are taken together when taxed. Anyway, the BIGGER error was that I accidentally told them to convert the wrong IRA account. I was (ignorantly/naively) using their mobile app which did not tell me how much money I had requested until it was too late to go back. I immediately went to cancel the order and there was no option for that. I tried to call them but since it was Saturday, their customer service was all closed. (I ignorantly/naively did not expect that a company like Vanguard doesn’t have 24/7/365 customer service). So, I called them first thing this morning and was told since the request was done on Saturday, it was already “processed” even though it is still in pending status and couldn’t be cancelled. After about 4 hours of trying to get them to cancel it (to be clear, the conversion was from/to Vanguard accounts in the same Vanguard mutual fund), a supervisor I talked to said he would try one last way to get it canceled and let me know how it goes. I haven’t heard back yet.

Now I am waiting and COMPLETELY freaking out about the tax implications if it goes through. The taxes due on the conversion would be more than my 2020 MAGI. Anyone able to provide some calming wisdom that this will turn out ok?

Thanks in advance from a total newbie.
dafioram
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Re: Roth conversion order cancellation (1st post)

Post by dafioram »

Your tax cost may be lower than you think. The actual taxable amount will be the percentage of your total ira holds that are pretax times the amount you converted. So if you have 10k non deductable and 90k pretax than 90% of whatever you convert is taxable.

If you can pay 110% of last years taxes then you will not owe a penalty. You will probably need to setup a repayment plan with IRS next april which may be manageable and allows you to figure this out in a year. You can send the IRS extra payments via estimated taxes or extra withholdings if your employer has the W4.
Last edited by dafioram on Tue Apr 06, 2021 6:08 am, edited 1 time in total.
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celia
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Re: Roth conversion order cancellation (1st post)

Post by celia »

In the worst case and the order goes through, do you have enough in taxable to pay the taxes (even if you have to sell something)? If so, time may show that you made a good move, such as if the year ends 20%+ higher.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
marcopolo
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Re: Roth conversion order cancellation (1st post)

Post by marcopolo »

myuniquename wrote: Mon Apr 05, 2021 11:09 pm TLDR - help

I was doing some financial planning this weekend and wanted to make sure I got some IRA contributions in 2020. I already am maxing out my 401k contributions. Well, I (ignorantly/naively) decided I should convert the small Vanguard IRA I hold with non-deductible contributions to a Roth since the money was already taxed. I say it was naive or ignorant because I also have another very large (to me) Vanguard IRA and I didn’t realize those are taken together when taxed. Anyway, the BIGGER error was that I accidentally told them to convert the wrong IRA account. I was (ignorantly/naively) using their mobile app which did not tell me how much money I had requested until it was too late to go back. I immediately went to cancel the order and there was no option for that. I tried to call them but since it was Saturday, their customer service was all closed. (I ignorantly/naively did not expect that a company like Vanguard doesn’t have 24/7/365 customer service). So, I called them first thing this morning and was told since the request was done on Saturday, it was already “processed” even though it is still in pending status and couldn’t be cancelled. After about 4 hours of trying to get them to cancel it (to be clear, the conversion was from/to Vanguard accounts in the same Vanguard mutual fund), a supervisor I talked to said he would try one last way to get it canceled and let me know how it goes. I haven’t heard back yet.

Now I am waiting and COMPLETELY freaking out about the tax implications if it goes through. The taxes due on the conversion would be more than my 2020 MAGI. Anyone able to provide some calming wisdom that this will turn out ok?

Thanks in advance from a total newbie.
Ouch. Sorry to hear about your situation.
Hope they are able to reverse the transaction.
I also find it quite unbelievable that there is no customer support during weekends.

Many people here often ask "Why would anyone need that?"
I guess this is one example.
Once in a while you get shown the light, in the strangest of places if you look at it right.
marcopolo
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Re: Roth conversion order cancellation (1st post)

Post by marcopolo »

celia wrote: Tue Apr 06, 2021 12:29 am In the worst case and the order goes through, do you have enough in taxable to pay the taxes (even if you have to sell something)? If so, time may show that you made a good move, such as if the year ends 20%+ higher.
Your love of Roth Conversions really has no bounds.
I admire your commitment.

Given the information we have, how would having the year end with a 20% gain make this a good move?
Once in a while you get shown the light, in the strangest of places if you look at it right.
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celia
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Re: Roth conversion order cancellation (1st post)

Post by celia »

marcopolo wrote: Tue Apr 06, 2021 12:59 am Given the information we have, how would having the year end with a 20% gain make this a good move?
Because the taxes would be paid on a smaller amount (today’s IRA value—-or a percentage of it).

In addition, if/when taxes are raised, we might all wish we had taken more advantage of today’s tax brackets, since they are at historic lows.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
marcopolo
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Re: Roth conversion order cancellation (1st post)

Post by marcopolo »

celia wrote: Tue Apr 06, 2021 1:12 am
marcopolo wrote: Tue Apr 06, 2021 12:59 am Given the information we have, how would having the year end with a 20% gain make this a good move?
Because the taxes would be paid on a smaller amount (today’s IRA value—-or a percentage of it).

In addition, if/when taxes are raised, we might all wish we had taken more advantage of today’s tax brackets, since they are at historic lows.
I believe you have a misunderstanding (again) about how the math works for Roth Conversions. The dollar amount of taxes paid has very little impact, what matters is the marginal tax rates at time of conversion vs. when the money is withdrawn. The OP didn't wish to make this conversions, presumably because they are in a higher tax bracket now while working than they plan to be later, either in early retirement (usually a good time for Roth Conversions) or during RMDs. If that is the case, having gains of 20% does not change that.

Example:

$10,000 in tIRA
Convert $10,000 today at 22% tax rate.
$2,200 tax paid.
$7,800 end up in Roth
20% gain yields $9,360 in Roth account.

$10,000 in tIRA
20% gain yields $12,000 in tIRA
Convert $12,000 today at 22% tax rate.
$2,640 tax paid.
$7,800 end up in Roth
yields the same $9,360 in Roth account.

You can do marginally better by paying taxes out of taxable account, but the difference is small, and does not make up for differences in marginal tax rates.

$10,000 in tIRA
Convert $10,000 today at 22% tax rate.
$2,200 tax paid out of taxable account.
20% gain yields $12,000 in Roth account.

$10,000 in tIRA, and same $2,200 in taxable (that you needed to pay taxes).
20% gains
$10,000 grows to $12,000 in tIRA
$2,200 grows to $2,640 in taxable account
Convert $12,000 at 22% tax rate
$2,640 tax paid out of taxable account.
Yields the same $12,000 in Roth account.

The difference is the capital gains taxes due on the extra $440 withdrawn from taxable account. At 15% tax rate that is $66.
Which is 0.66% of the original $10,000 that was converted. Not nearly enough to make up for converting at a higher marginal tax rate.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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celia
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Re: Roth conversion order cancellation (1st post)

Post by celia »

marcopolo wrote:
Marco, your post does nothing to calm the OP, which was requested.

Based on the little info we have, the OP is already in a high tax bracket (able to max out 401K, doing Backdoor Roth’s). High wage earners are likely the ones to also have high income streams in retirement, unless they retire very early. I think that the odds are good that today’s highest tax rate has a good chance of being lower than future highest tax rates.

And the younger OP is, the more his/her income will increase as they advance in their career (which would push them into higher tax brackets while working).

So I think it is wrong to assume OP will be in lower tax brackets in the future compared to where they are today.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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JoMoney
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Re: Roth conversion order cancellation (1st post)

Post by JoMoney »

OP, please let us know if Vanguard was able to cancel the transaction.
I don't have anything reassuring to say if they can't, recharacterizing a roth conversion are no longer a thing :(

If they can't, the next steps are going to be figuring out how to deal with taxes as efficiently as possible. You implied that the taxes that might be owed could be more than your income, if that's the case you won't be able to manage it through withholding and may need to look at estimated tax payment or face a penalty (there might be some 'Safe Harbor' provision to avoid that.) Hopefully you have a taxable source of funds to pay the taxes from, the problem could be compounded if you have to withdraw from the roth at a penalty to pay the taxes on the conversion :( :( ...but that's getting ahead of things, hopefully Vanguard will get this somehow cancelled/reversed.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
Topic Author
myuniquename
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Re: Roth conversion order cancellation (1st post)

Post by myuniquename »

Thanks for all the reassuring words and empathy. I called again first thing this morning because it now showed online the order was now complete. I was hoping that maybe that was ok and they can still retroactively cancel? I even remembered that they made a mistake on the amount of a distribution for my divorce settlement and they did fix that days later. The good news is, per the supervisor I spoke with yesterday and the notes they’ve taken on the conversation, a cancellation is in progress! They say to expect to see it in about 10 business days. I’m holding off on that being displayed for the full relief.

Y’all did made me think more about what would happen if it does go through. I realized I have about a third of the tax that would be owed in my emergency fund. (Hey! This qualifies! lol) I also am still able to save some each month in savings (I have a little over 3 months in my EF so far but growing). If they would accept something like a payment plan instead of me having to withdraw some of the IRA or my 401k, or the equity in my home or rental property, I could manage I think. I’m hoping that won’t be necessary but definitely appreciate the calming guidance.

Also, I am 50, make a good income (24% bracket) and just finished up saving and paying for my kid’s college education (she’s expecting to graduate next spring.)

I also really appreciate the comment that others have brought up the issue of Vanguard support not having weekend hours! It’s good to know I’m not alone in that, even with smart investors. I’m also really grateful no one chastised me for the mistake. I’ll definitely be more careful in the future no matter how this turns out!
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celia
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Re: Roth conversion order cancellation (1st post)

Post by celia »

OP, don’t touch anything in your IRAs until this is resolved. But since you were attempting to convert the small IRA, were you aware that the pro rata rule would apply when calculating taxes on any withdrawal or conversion from your TIRAs (and that it will continue to apply until all your TIRAs are emptied)?

See the Backdoor Roth wiki page for further info.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Alan S.
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Re: Roth conversion order cancellation (1st post)

Post by Alan S. »

celia wrote: Tue Apr 06, 2021 1:19 pm OP, don’t touch anything in your IRAs until this is resolved. But since you were attempting to convert the small IRA, were you aware that the pro rata rule would apply when calculating taxes on any withdrawal or conversion from your TIRAs (and that it will continue to apply until all your TIRAs are emptied)?

See the Backdoor Roth wiki page for further info.
Very good advice.
If you are trying to convince a firm to unwind an action, do not create later transactions that would also have to be unwound. The more difficult the process is for VG, the less likely they are to agree to it.

All firms keep whatever authority they have with the IRS to unwind transactions very close to the vest. It is also likely that any such authority VG has can only be approved by a very limited staff with authority to sign off. Maybe someday a former employee will disclose what authority exists, but for obvious reasons custodians do not want any guidelines to leak out. Any potential approval must also factor in what tax reporting or internal systems must be altered to reflect the change. This is why if there is any chance whatsoever to get a favorable decision, the sooner you bring an issue to the custodian's attention, the better your chance of satisfaction. Once a transaction such as a conversion reported on a 1099R and 5498 has been reported to the IRS chances for success diminish even more.
Topic Author
myuniquename
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Re: Roth conversion order cancellation (1st post)

Post by myuniquename »

celia wrote: Tue Apr 06, 2021 1:19 pm OP, don’t touch anything in your IRAs until this is resolved. But since you were attempting to convert the small IRA, were you aware that the pro rata rule would apply when calculating taxes on any withdrawal or conversion from your TIRAs (and that it will continue to apply until all your TIRAs are emptied)?

See the Backdoor Roth wiki page for further info.
Right so I think I mentioned that in my original post. I feel like I knew this but then forgot. So Vanguard took care of the reversal (thank g—) and now I’m hesitantly thinking of doing what I “should” do at this point. I am maxed on my 401k, I have a $500+k traditional rollover ira and another very small (less than 2k) traditional ira from non-deductible contributions. The iras are invested in the Target 2035 fund (I’m 50). The 401k is in Target 2045, which for whatever reason is the only target fund they offer (it’s a small company). They also have a Roth 401k option.

My company’s 401k also will accept ira rollovers. So since I have an emergency fund, I have two fairly low mortgages (3.75 on my primary home and 4.625 on a rental property), and I will hit the contribution limit on my 401k, I figured switching contributing more to my non-deductible TIRA and regularly converting it is the recommended action. The part I wasn’t thinking of was I need to move the Rollover IRA.

So my plan is:
1. Rollover my current Rollover IRA to my traditional 401k
2. Convert the traditional Ira to Roth IRA.
3. At the end of each year, contribute the max to my Traditional IRA and convert it to Roth.

Questions:
- Is this the right order? I’m wondering if I should swap 1 and 2 and contribute for 2020 now, or just forgo this year.
- This seems like I may be overthinking and veering away from keep-it-simple strategy. Am I better off just leaving the money in the iras as-is? Don’t worry about the non-tax deductible IRA contributions and just keep doing them?

Thanks in advance.
RetiredAL
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Re: Roth conversion order cancellation (1st post)

Post by RetiredAL »

myuniquename wrote: Sat May 15, 2021 4:00 pm
So my plan is:
1. Rollover my current Rollover IRA to my traditional 401k
2. Convert the traditional Ira to Roth IRA.
3. At the end of each year, contribute the max to my Traditional IRA and convert it to Roth.

Questions:
- Is this the right order? I’m wondering if I should swap 1 and 2 and contribute for 2020 now, or just forgo this year.
- This seems like I may be overthinking and veering away from keep-it-simple strategy. Am I better off just leaving the money in the iras as-is? Don’t worry about the non-tax deductible IRA contributions and just keep doing them?

Thanks in advance.
Technically, the order of 1 and 2 does not matter, as long as #1 occurs before Dec 31. If me, I'd stay on the safe side. I'd do do #1 first, since if it hiccups you won't have a mess of dealing with and/or having to prorating #2.

Since you are considering trying to squeeze in a 2020 contribution with few days left, instead consider not rolling all of that deductible IRA back into you 401K and convert what you leave behind. Whereas a contribution has a $ limit, a conversion does not. The conversion could be $10K, $25K, or whatever you feel comfortable paying the tax bill on.
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retired@50
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Re: Roth conversion order cancellation (1st post)

Post by retired@50 »

myuniquename wrote: Sat May 15, 2021 4:00 pm So my plan is:
I'll offer one additional step, to be completed before step 1.

STEP 0. Set down your mobile phone and go sit at a real computer and use the Vanguard website.

Best of luck.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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