Small Conversion
Girlfriend lost job, had $1,350. in that employers Retirement IRA account, amount was then transferred by her into a TradeKing IRA and has sat there in cash for about a year as she kind of forgot about it, I suggested transferring it into her Roth IRA at TradeKing, so now she has the direct conversion form – There are 2 choices for withholding elections, 1st choice is withhold Federal income taxes at a rate of _% from amount & State income tax of _% OR “2nd choice is effective _ elect to not have any Federal income tax withheld”
I’m guessing it’s better to choose option #2 and then she’d have to report the amount as taxable income next year for this years taxes???? otherwise she’d pay 10% penalty on the amount taken out, correct??
Permalink Submitted by Alan - IRA critic on Tue, 2016-03-15 04:57
Yes, withholding should be declined especially for a conversion this small. Withheld amounts would be taxable and subject to penalty and would be lost to her IRA as well. Of course, she could replace the withholding with other funds to eliminate the penalty but then would have two conversions. But to avoid the additional transactions, best to decline withholding. With a job loss, she probably will have less taxable income this year anyway.