@SLYKTAX wrote:
Thank you very much.
I should do no tax withholding and make estimate tax payment separately. That way I can convert more to ROTH.
By taking a distribution of $2,000 for tax withholding is not a wise move.
Vey good lessons leant.
Thanks again.
Not necessarily. I could go into the detailed rules of why I am making these tips, if necessary, but here are some tips:
1. If you convert in the last quarter of the year, and don't have withholding, you can be hit with an underpayment penalty, even if you make the correct estimated payment on time. Having withholding avoids this penalty.
2. Once way to make a complete conversion is to add extra money. You can do this within 60 days and call it a rollover. For example, you convert $15,000 on December 1 and want to withhold $3000 for taxes. $12,000 goes into the Roth IRA on December 2. You have 60 days to deposit $3000 into the Roth IRA from other money (savings account, other investments) and call it a rollover. Just tell the Roth IRA it is a rollover, they don't need to know or care that it is part of the conversion. It all works out on your tax return. Of course, this is assuming you have the money to cover the difference in another account you can pull from.
This is probably the best way to make a late-in-the-year conversion without paying a penalty for under-withholding, as long as you have the separate funds to cover the taxes.
3. However, if you convert in the first quarter of the year, you have 4 quarters to make estimated payments and not pay a penalty. For example, you convert $15,000 on February 1 and have no taxes withheld. You determine that your estimated tax payment should be $3000. You could pay the full $3000 by the deadline for the first quarter, which is April 15. Or, you could pay equal quarterly estimates of $750 on April 15, June 15, Sept 15, and Jan 15 of the next year, and you would be considered in compliance with the rules on estimated payments, even though you delayed part of the estimate for almost a year.
I could go into details, but this has to do with how the IRS determines the tax due dates for earnings, withholdings, and estimated payments. Anyway, the bottom line is that converting late in the year and not having withholding can result in a penalty. You can avoid this by converting late in the year, having withholding, and depositing the make-up funds as another rollover; or by doing the conversion early in the year.
Cheers.
