Traditional to ROTH IRA conversion-tax withholding?

[arch01]

I'm taking about half of my traditional IRA and moving it to a ROTH. I already have the ROTH open and it only has $300 in it, uninvested. I just dumped some stock in my traditional and combined can make the purchase I want. I'm not interested in moving all of my traditional over to the ROTH, but I don't see us ever putting more money into it.

ShareBuilder is asking about tax withholding. WWMMD?

FWIW this year is going to be unpredictable for us-DH just got a new PT job and we withheld extra on Federal because he won't hit the threshold to have taxes taken out on each check. I'm still predicting a <$4k federal refund, owing <$1k on state. I need to adjust my state withholding on my PT job since I never have any taken out. I'm transferring about $6k. We're solidly in the 25% bracket. Our state has a flat tax rate at 5.75%.

[delawarejen]

I wouldn't bother on withholding federal since you're expecting a refund anyway. As for state, I would just adjust your withholdings at work enough to cover it.

[arch01]

May 21, 2015 10:46:59 GMT -5 delawarejen said:

I wouldn't bother on withholding feferal since you're expecting a refund anyway. As for state, I would just adjust your withholdings at work enough to cover it.

That's what I was thinking-thanks. These PT jobs are fun but man do they mess things up

[SJ]

I can't begin to answer this unless I know how much we are talking about Is half your traditional IRA $5K? $50K? $500K?

The refund may or may not cover it.

[arch01]

May 21, 2015 12:23:27 GMT -5 SJ said:

I can't begin to answer this unless I know how much we are talking about Is half your traditional IRA $5K? $50K? $500K?

The refund may or may not cover it.

I'd have roughly $7k left in the traditional. Transferring $6k-ish to the ROTH.

[SJ]

May 21, 2015 12:31:56 GMT -5 arch01 said:

May 21, 2015 12:23:27 GMT -5 SJ said:

I can't begin to answer this unless I know how much we are talking about Is half your traditional IRA $5K? $50K? $500K?

The refund may or may not cover it.

I'd have roughly $7k left in the traditional. Transferring $6k-ish to the ROTH.

You should be ok given your previously expected $4K refund

[arch01]

May 21, 2015 14:31:17 GMT -5 @juno said:

I'm nothing close to a tax expert but i think i remember from somewhere that withholding the funds for taxes from your ira during conversion is considered a distributed and you'd be socked with penalties for that? I may be completely talking out of my ass with that, but i'd talk to a tax person first.

If I remember correctly no, as long as you deposit it within 60 days to the ROTH account.

[cjeanette]

May 21, 2015 14:31:17 GMT -5 @juno said:

I'm nothing close to a tax expert but i think i remember from somewhere that withholding the funds for taxes from your ira during conversion is considered a distributed and you'd be socked with penalties for that? I may be completely talking out of my ass with that, but i'd talk to a tax person first.

To my knowledge this is correct.  It's been years since I studied this though.

We always have our clients mark no w/h on these forms.  

[arch01]

May 21, 2015 14:47:36 GMT -5 @juno said:

May 21, 2015 14:39:08 GMT -5 arch01 said:

If I remember correctly no, as long as you deposit it within 60 days to the ROTH account.

I may not be understanding, so i'm sorry if i am, but the tax amount is a "distribution." So say you want to convert $100,000. You have them withhold $30,000 and send it to the irs to pay taxes and $70,000 goes to the Roth (is this the 60-day part you mean?). I think i'm remembering that the $30,000 is a distribution and there's some sort of penalty (10 percent??) on it unless you are exempt for some reason (like age).

www.fool.com/money/allaboutiras/allaboutiras05.htm

This explains it well. As long as it is deposited within the 60 day time frame it is looked at as a qualified distribution and therefore exempt from the 10% early withdrawal penalty.

[arch01]

I think I may understand now what you are talking about If you select the box that set the side money for taxes it is like paying a tax bill in advance. You don't get penalized for setting aside the money to pay your taxes

[kadams767]

May 21, 2015 15:14:53 GMT -5 arch01 said:

May 21, 2015 14:47:36 GMT -5 @juno said:

I may not be understanding, so i'm sorry if i am, but the tax amount is a "distribution." So say you want to convert $100,000. You have them withhold $30,000 and send it to the irs to pay taxes and $70,000 goes to the Roth (is this the 60-day part you mean?). I think i'm remembering that the $30,000 is a distribution and there's some sort of penalty (10 percent??) on it unless you are exempt for some reason (like age).

www.fool.com/money/allaboutiras/allaboutiras05.htm

This explains it well. As long as it is deposited within the 60 day time frame it is looked at as a qualified distribution and therefore exempt from the 10% early withdrawal penalty.

Is this article correct, that you can't convert a traditional IRA to Roth if your AGI is $100,000+?

[cjeanette]

May 21, 2015 15:14:53 GMT -5 arch01 said:

May 21, 2015 14:47:36 GMT -5 @juno said:

I may not be understanding, so i'm sorry if i am, but the tax amount is a "distribution." So say you want to convert $100,000. You have them withhold $30,000 and send it to the irs to pay taxes and $70,000 goes to the Roth (is this the 60-day part you mean?). I think i'm remembering that the $30,000 is a distribution and there's some sort of penalty (10 percent??) on it unless you are exempt for some reason (like age).

www.fool.com/money/allaboutiras/allaboutiras05.htm

This explains it well. As long as it is deposited within the 60 day time frame it is looked at as a qualified distribution and therefore exempt from the 10% early withdrawal penalty.

But the portion withheld for taxes should still be subject to the withdrawal penalty and taxes since it is not converted.  The withholding is a distribution.

[sometimesrunner]

May 21, 2015 15:46:35 GMT -5 kadams767 said:

May 21, 2015 15:14:53 GMT -5 arch01 said:

www.fool.com/money/allaboutiras/allaboutiras05.htm

This explains it well. As long as it is deposited within the 60 day time frame it is looked at as a qualified distribution and therefore exempt from the 10% early withdrawal penalty.

Is this article correct, that you can't convert a traditional IRA to Roth if your AGI is $100,000+?

This article is old. The AGI limitation was lifted a few years ago.

[arch01]

cjeanette is right. The rep I talked to at ShareBuilder conveniently left out that part about the taxes. Ugh.