Rollover IRA conversion to Roth IRA- where to pay taxes from
If I am over 59 1/2 and I have an IRA Rollover Account Valued at $968,000 and I want to convert it to a Roth IRA, I’m looking at paying a tax of roughly $320,000 for the conversion. Is it necessary for me to pay the taxes from another account or would it be possible for me to pay the taxes directly out of my new Roth IRA?
Thank you!
Permalink Submitted by Alan Spross on Wed, 2008-11-19 17:28
Since you are over 59.5, there is no early withdrawal penalty on conversions held under 5 years. So you could take a tax free distribution from the Roth to pay the taxes if you needed to.
But this all suggests that you may be over doing Roth conversions in total as well as converting so much in a single year that you will inflate your tax bracket. The benefit of a conversion is largely lost if you pay a higher tax rate on the conversion than you will average in retirement.
Granted, if you have extensive assets other than retirement assets, you may be in a high bracket in retirement that would be aggravated by RMDs, and in that case larger conversions may help.
Knowing how much to convert in your situation would have to be determined by a tax professional, who would need to analyze your financial situation in considerable detail. A plan could be developed to convert an incremental amount over a period of years to stay out of the higher brackets. If you are already in the top bracket and are concerned about that bracket increasing back to 39.6%, then this could be justified.
You could also simply have taxes withheld from the TIRA distribution at the rate you wish and convert the net amount rather than later taking a distribution from the Roth to pay them. The main factor here is whether you are exposed to an underpayment penalty.