403b to Roth conversion – and pay tax with cash.

Submitted by palle henckel on Thu, 2019-12-05 18:55

We have a low income tax rate this year.
We want to convert parts of a 403b to Roth Ira.
It seems to be most advantageous to pay the tax due for this from an external cash account (which we have).

But apparently there is required minimum Federal Tax withholding of 20% when we convert 403b. This makes it impossible to do the conversion and pay tax from the external cash account.

But what about this 2 step process:
Convert a 403b to a regular IRA – no tax withheld since both are pretax.
Then convert from the regular IRA to a roth IRA and have 0% tax withheld from the IRA conversion (and pay the tax from our external cash account instead).

Would this work?



Submitted by David Mertz on Thu, 2019-12-05 20:00

  • There is only minimum required federal tax withholding on an indirect rollover where the distribution from the 403(b) is paid to you personally.  There is no minimum required withholding on a direct rollover from a 403(b) paid directly to a Roth IRA for your benefit.  The plan is required to offer you the option of a direct rollover.
  • Even if you did an indirect rollover where a minimum of 20% was withheld for taxes, if you presently have the money in non-retirement funds that you would otherwise use to pay the taxes you would just use that money to complete the rollover to the Roth IRA of the entire gross distribution.  The net result would generally be the same as doing a direct rollover.

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