I learned about "erase and replace" where in order to bring up your federal tax withholding - you withdraw from your IRA with 100% fed withholding, then use the 60 day indirect rollover to replace the money in the IRA. The withholding supposedly still counts.
The purpose of this is to bring up fed tax withholding to meet the 110% last year tax safe harbor rule (or 100% if you have lower AGI).
Example:
By dec 31st 2024, my W4 withholding even if I give up paychecks between now and then will not in total meet the 110% tax amount from last year. Let's say I am $10,000 short.
I take a check from my IRA for $10,000. Make it 100% fed withholding. This puts me at or past the amount I needed for safe harbor. Then within 60 days, I deposit $10,000 "back" into the account although this is sourced from money elsewhere categorized as a rollover. This is indirect, and I can make 1 of these every 12 rolling months. I don't plan to do it again so that's okay.
If I have a $50,000 tax that I need to pay when file in April 2025, it won't be hit with underpayment which is 8%. So I think my penalty would be $4000 on top of the tax I owe.
Anyone heard of this before and how viable is it? Is it easy to file this? Another potential wrinkle is that this isn't a traditional IRA, it's Roth IRA that I've funded via backdoor in the beginning of the year. This is seemingly okay per the IRS since thats a direct rollover, whereas this erase and replace method is an indirect rollover. But should I be concerned with the Roth IRA rules in anyway, Im positive the $10,000 is contributions so I should be safe.
Here's some resources on it
https://www.thetaxadviser.com/issues/20 ... ments.html
https://financialducksinarow.com/1663/i ... -payments/
https://www.kitces.com/blog/estimated-t ... ributions/
There was some loosely related discussion here about how it counts for fed withholding for underpayment purposes too
viewtopic.php?f=2&t=369815
I'm a bit lost of the filing part of the process too. Taxes will be withheld but then I'm also noting a rollover of the same amount. It won't negate and it won't trigger fees I hope?
The purpose of this is to bring up fed tax withholding to meet the 110% last year tax safe harbor rule (or 100% if you have lower AGI).
Example:
By dec 31st 2024, my W4 withholding even if I give up paychecks between now and then will not in total meet the 110% tax amount from last year. Let's say I am $10,000 short.
I take a check from my IRA for $10,000. Make it 100% fed withholding. This puts me at or past the amount I needed for safe harbor. Then within 60 days, I deposit $10,000 "back" into the account although this is sourced from money elsewhere categorized as a rollover. This is indirect, and I can make 1 of these every 12 rolling months. I don't plan to do it again so that's okay.
If I have a $50,000 tax that I need to pay when file in April 2025, it won't be hit with underpayment which is 8%. So I think my penalty would be $4000 on top of the tax I owe.
Anyone heard of this before and how viable is it? Is it easy to file this? Another potential wrinkle is that this isn't a traditional IRA, it's Roth IRA that I've funded via backdoor in the beginning of the year. This is seemingly okay per the IRS since thats a direct rollover, whereas this erase and replace method is an indirect rollover. But should I be concerned with the Roth IRA rules in anyway, Im positive the $10,000 is contributions so I should be safe.
Here's some resources on it
https://www.thetaxadviser.com/issues/20 ... ments.html
https://financialducksinarow.com/1663/i ... -payments/
https://www.kitces.com/blog/estimated-t ... ributions/
There was some loosely related discussion here about how it counts for fed withholding for underpayment purposes too
viewtopic.php?f=2&t=369815
I'm a bit lost of the filing part of the process too. Taxes will be withheld but then I'm also noting a rollover of the same amount. It won't negate and it won't trigger fees I hope?
Statistics: Posted by Zerosum- — Thu Nov 14, 2024 10:55 pm — Replies 0 — Views 27