I'm trying to do a direct rollover from a 401k to a roth ira. My form is asking me to put a federal withholding % on rollover to roth. What is the % I need to put?

[mkonukcu84]

I'm from California and I need to put a % for my federal withholding. I need to know what the % is that I need to fill in. Please let me know, thanks.

[Opus 17]

Ideally, zero, if you can afford it.  Here's how it works:

1. You rollover $10,000 pre-tax 401(k) into a Roth IRA.  You have zero withheld.  You owe about $3500 income tax on the conversion (state plus federal) and you pay this from other sources of funds.

Or,

2. You rollover $10,000 pre-tax 401(k) into a Roth IRA and have 30% withheld.  This means that only $7000 is converted to the Roth IRA and the remaining $3000 (that was withheld) becomes a taxable distribution from the IRA, subject to income tax plus the 10% penalty for early withdrawal if you are under age 59-1/2.  The tax on the $3000 distribution is about $1500 against $3000 of withholding, so you would get the other $1500 back as part of your tax refund. 

[I have to edit this answer since this a Roth conversion]

2. You rollover $10,000 pre-tax 401(k) into a Roth IRA and have 30% withheld.  This means that only $7000 is converted to the Roth IRA and the remaining $3000 (that was withheld) becomes a taxable distribution from the IRA.  The $7,000 Roth conversion is taxed (guesstimate of $2400) and the $3000 distribution is also taxed, plus a 10% penalty for early withdrawal if you are under age 59-1/2 (guesstimate $1350).  So you pay more tax  overall and end up with less money in the Roth account. 

[End of edit] 

So you really want zero withheld so all the 401(k) amount is rolled over to the Roth.  This means you must pay the taxes out of other funds.  If the rollover is in January 2021, you must make an estimated tax payment by April 15, 2021, to both the state and IRS.  Depending on your other income, the state tax is 8-13% and the federal tax is probably 22-26%.

Because this counts as income, it may raise your tax bracket, and you might want to do the conversion in steps over a few years.  Or you might want to do the conversion in steps if you can't afford the income tax all at once, depending on how much is converted. 

[VolvoGirl]

20% withholding is a safe amount.  But then the whole amount won't go into the ROTH IRA.  You should try to send in a separate Estimated payment with money outside the 401K so the whole amount goes into the IRA.  Then put 0 for withholding.  Or maybe they won't let you do it without withholding.  @dmertz 

[dmertz]

As Opus 17 said, for the most benefit you want the entire gross amount of the distribution from the 401(k) to end up in the Roth IRA, and that's most easily accomplished by having no taxes withheld and using other money to pay the taxes via estimated tax payments.  Tax withholding can only be avoided by doing a direct rollover.  If you do have taxes withheld, you have the option to substitute other funds within 60 days to indirectly complete the rollover of the entire amount.

California permits state tax withholding to be avoided only if you have no federal taxes withheld.

[Opus 17]

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@dmertz wrote:

  If you do have taxes withheld, you have the option to substitute other funds within 60 days to indirectly complete the rollover of the entire amount.

California permits state tax withholding to be avoided only if you have no federal taxes withheld.

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This is an important point.  A third option is to have tax withheld -- I'll guesstimate 24% federal and 10% California.  For a $10,000 rollover, that would mean that $3400 goes for taxes and $6600 to the Roth IRA.  You then have 60 days to beg, borrow or steal an additional $3400 to put into the Roth IRA to complete the rollover.  (Make sure the Roth custodian knows you are using the 60 day rollover rule and does not treat it as a regular contribution.)  If you can do that, then you have a $10,000 rollover and you withheld enough to cover the tax.  Now you just have to pay off wherever you got the extra money.  If you can only put part of the money into the Roth in 60 days -- suppose $2000 -- then you end up with a $8600 rollover and a $1400 distribution from the 401(k).

Hope that makes sense.

Because of the 10% penalty for early withdrawal, it may make financial sense to borrow the funds needed to complete the full rollover, as long as you pay less than 10% interest.  (And if you can't pull it from savings or other investments.)