I guess the question about outside funds means, as an alternative to withholding? Suppose you convert $10,000 but have 25% withheld. That means that you are really only converting $7500 and the other $2500 counts as a distribution, which will be subject to both regular income tax and a 10% early withdrawal penalty unless you are over age 59-1/2. To prevent this from happening, you would have to find $2500 of outside money and send it to the Roth IRA custodian within 60 days, for it to count as part of the conversion.
Or, do the conversion with no withholding, and then find outside money to pay the $2500 of tax. This way, you won’t owe additional tax for early distribution because you have converted the entire amount. I think this was what you were asking about.
Now the question is, how and when to pay the additional tax. To pay the tax directly to the IRS, the best way is to use the IRS website www.irs.gov/payments. Select “2021 estimated taxes“ from the pulldown menu as the reason for the payment. As far as when to pay, if the conversion happens before the end of August, an estimated payment is due September 15. If the conversion happens after September 1 and before December 31, an estimated payment is due January 15, 2022. If you don’t make the estimated payment, you may owe an underpayment penalty even if you pay in full when you file your tax return, because the tax system is supposed to be pay as you go. If you pay too much in estimated taxes, the excess will be returned to you as part of your tax refund.
