tax implications on the conversion of traditional IRA to Roth IRA

Forum|Forum|5 years ago
August 19, 2020
2 replies
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Okay, this is my question.

I've got an employer-sponsored retirement plan and Roth IRA.

Now, I want to roll over the whole fund (about $1,7000) of one plan to Roth IRA.

I've got two options: 20% Federal tax pay now, or pay later during the tax filing season next year.

Which is better for me? If I pay the tax later, does this taxable fund count as income in my adjusted gross income? Even this taxable fund is added to my income, I belong to the 12% tax bracket zone.

What do you think is the best solution for me?

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Best answer by macuser_22

Most financial planers will advice to always pay the tax on a Roth conversion separately if possible, to preserved the retirement principle. If only 80% of the 401(k) is converted then it will probably take many years for it to grow back to the current value.

You should not wait until tax time next year to pay the tax, it should be paid as an estimated tax in the quarter that the conversion is done to avoid an underpayment of tax penalty. Taxes are pay as you go. If you wait until tax time and owe more than $1,000 tax then there can be an underpayment penalty if estimated tax is not paid during the year.

VolvoGirl

Employee

You aren't paying the tax now. It is withholding like from your paychecks. Yes you should have withholding taken out so you don't owe too much when you file your tax return.

Either way it will be included in your income next year.

cspyonAuthor

So, which is better, pay 20% federal tax of this amount at the time of conversion, or pay it as part of my adjusted gross income during the tax filing time (12% tax bracket band) next year?

VolvoGirl

Employee

Either way you want. You will get a 1099R for it and still enter the full amount converted as income. Then all your withholding (W2 and 1099R) is subtracted from the tax due. If you don't have withholding taken out you may owe a penalty on your tax return for not paying in enough during the year. Are you converting 1,700 or 17,000? It will increase your AGI and may push you into a higher tax bracket. So be careful.

macuser_22

Employee

First, an employer sponsored retirement plan is NOT a Traditional IRA - it is probably a 401(k) plan.

Any tax withholding is part of the distribution and will be taxable income include in your AGI. If you can rollover the entire amount and pay estimated tax from other funds then there will be more money to convert conserving the retirement account. That is usually recommended of you can afford the tax from other funds.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**