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Roth Conversion Confusion – Taxes Withheld When Under 59½

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 NC
(@nc-cpl)
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Joined: 3 years ago
Posts: 256
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If you're under 591/2 and considering a Roth conversion, be careful if you have to use any portion of the conversion to pay the tax, as it's considered an early withdrawal and hit with the 10% penalty.

Example: John is 35 years old. He has a traditional IRA worth $100,000. John discussed the possibility of a Roth conversion with his advisor, but was concerned he did not have the extra funds available to cover the taxes due on the conversion. John’s advisor suggests having the taxes withheld from the IRA. This is bad advice, but John is unaware of the consequences. John converts the entire $100,000 and has $20,000 withheld for taxes. This $20,000 never gets converted. It is an early withdrawal, and John is hit with a 10% penalty of $2,000.

Copied from Ed Slott article.


   
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(@hines202)
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Joined: 4 years ago
Posts: 411
 

Agreed, pay those Roth conversion taxes out-of-pocket! That conversion money growing tax free is gold. Plus, you can wait and pay in April, and perhaps receive more earnings on the money in the interim, before handing it over to your Uncle Sam.


   
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(@mdgoodsm)
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Joined: 6 months ago
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@hines202 If you do not pay the owed taxes until April, can you be hit with an underpayment penalty?


   
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(@hines202)
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Joined: 4 years ago
Posts: 411
 

@mdgoodsm I'd check with a CPA but from memory, if you're doing them when most folks do late in the year then no. I usually wait until early Dec when the tax situation is finalized. I'd imagine that might be different if, for example, you take advantage of a big market drop earlier in the year and go for a big conversion. In that case maybe I'd do a quarterly payment to cover it. Maybe someone knows for sure?


   
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