@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.
Unless you are over age 59-1/2, or you left this employer at age 55 or older, the only not-stupid thing to do is:
4) convert the entire amount to a Roth IRA with no withholding, and make an estimated payment to the IRS in the amount of $2040 from other funds (if you are sure you will be in the 12% tax bracket). You will also likely need 5% or so to make an estimated state tax payment, depending on what state you live in.
Even if you have to borrow the $2000 to pay the tax, you come out ahead as long as you pay less than $300 of interest when you pay off the loan.
If you can't come up with $2000 now to pay the tax up front from other funds, maybe you can come up with $1000 and convert half this year and half next year.
