Converting IRA to Roth help

Forum|Forum|4 years ago
August 26, 2021
2 replies
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So, I know that converting my traditional IRA to a ROTH will count as income because it’s not money I put into it this year. I’ve checked that it won’t affect my tax bracket or my deductions. How do I handle withholding to keep from paying a huge tax bill on money not going in my pocket? Does the company who I work with for my IRA withhold an estimated tax? Or just the estimated “early retirement” penalty? Should I ask them to withhold anything or would that make my taxes worse??

macuser_22

Alumni - Champ

You can request to have any amount of the distribution to be withheld to pay the tax, but that will also be part of the taxable distribution and it is less money to put in the Roth. It is best to convert all the money and keep it growing in an IRA if possible, if you have other funds to pay the tax with. You can pay it as estimated tax using other funds.

**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.**

hkiara44Author

Level 2

How do I “estimate” the tax with other funds?

macuser_22

Alumni - Champ

IRA distributions are taxed a ordinary income just like W-2's at your margional tax rate. You can get a rough estimate using the "TaxCaster" tool https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

**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.**

Opus 17

Level 15

Let’s suppose you want to convert $10,000. If you withdrew $10,000 and had the custodian withhold 20% for taxes, then you would end up only converting $8000, and the other $2000 counts as a regular distribution. If you are under age 59 1/2, that’s subject to an additional 10% penalty tax.

If you can afford to take the $2000 in taxes from other funds that you have, you would convert the entire $10,000 without the first trustee withholding anything. You can make a estimated tax payment on your own using the IRS website www.irs.gov/payments.

Depending on your tax bracket, the conversion may cost 12%, 22%, or 24% in federal taxes (for most people). You can also expect to pay between 3% and 10% in state taxes, depending on which state you live in and what your income level is.

Also note that in some circumstances, the conversion can have repercussions in other areas of your tax life. For example, depending on your age and life situation, raising your income with a Roth conversion might disqualify you from claiming the American opportunity credit for college tuition that you pay for a dependent child, or it may reduce your eligibility for the child tax credit, or it may increase the taxability of your Social Security.

fanfare

Level 15

If you don't do it the way @macuser_22 and @Opus 17 described,

you will be a really unhappy camper at tax time when you realize you are paying income tax and penalty on your withholding that was supposed to pay your tax n the first place.

Critter-3

Level 15

Also the ENTIRE IRA doesn't have to be converted all at once in one tax year ... if you time it right you can minimize the amount of taxes you pay all together. Sit down with a tax and/or financial planner to see what suits you best. If you are over the age of 60 then making the conversion may or may not be a wise choice so taking your entire financial story into consideration is the right thing to do... think on this before making any moves.