@cspyon wrote:
Okay, that's good to know!
So, if I understand correctly, this is what it looks like:
1) pay federal tax (20%) for $17,000 now. In this case, I pay $3,400 from the fund, so the actual transfer amount is $13,600 into Roth IRA.
2) pay the tax later. In this case, $17,000 is in Roth IRA, and it will be added to my annual self-employed income (12% tax bracket for now) and pay the tax in this bracket, not in the 20% bracket.
3) Once the fund is in Roth IRA, it will grow tax-free without me having to worry about the so-called underpayment penalty.
1) If you have $3,400 *withheld* to pay the tax, the you only have $13,600 left to convert to the IRA so it will have to grow back to $17,000 just to break even. The entire $17,000 distribution will be taxable income including the $3,400 withholding but if you are under age 59 1/2 then the $3,400 will also be subject to a 10% ($340) early distribution tax.
2) If you pay the *estimated* tax at the time of the distribution, (not later) using other funds, then the entire $17,000 can be converted with not loss for taxes. Either way the entire $17,000 is added to your AGI and is taxable income - the only difference is how the tax is paid.
3) The "underpayment" penalty has nothing to do with the IRA. The penalty is based on how much additional tax that you must pay to the IRS when you file your tax return. If $1,000 of more then there can be a penalty - paying estimated tax before filing avoids the penalty. (Withholding and estimated tax are almost the same. With withholding the account custodian removes the money and sends it to the IRS, with estimated tax you send it to the IRS.)
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
