Roth Conversion for People Under 59 1/2
28-year-old taxpayer wants to convert funds from INHERITED IRA (Death occurred in 2019) to a Roth IRA. She does not currently have after tax funds to pay taxes on the conversion.
Custodian (Fidelity) allows her to withhold a percentage to help pay taxes next April.
Andy Ives’ article (Slott Report) sent today says it is not a good idea to do this because the withheld percentage amount is not converted, and taxpayer would be hit with a 10% penalty on the withholding amount.
Is there any suggestion how such a taxpayer can do the conversion AND withhold without paying a penalty?
thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2023-07-31 22:31
An inherited IRA cannot be converted unless the surviving spouse is the beneficiary. A non spouse beneficiary cannot convert an inherited IRA. But to your question, if an IRA owner converted and taxes were withheld, there are only two options to avoid tax and penalty on the withheld amount. The first is to use other funds to complete a 60 day rollover to the Roth IRA of the amount withheld, which would eliminate the penalty because the full amount will then have been converted. The second is to separately qualify for a penalty exception such as being disabled, paying qualified higher education expenses, paying for medical insurance while unemployed, paying unreimbursed medical expenses in excess of 7.5% of your AGI, or up to 10,000 for purchasing a first home.