In a Roth IRA Conversion (from a traditional IRA) how do I answer on the tax withholding election?

Question

I am transferring a traditional (rollover) IRA to a ROTH Ira, both within the same company (Ameritrade). The form gives me options in the "Tax Withholding Election" section
1) I elect not to have Federal Income Tax withhold effective (enter the date you wish)
2) Please withhold taxes at the rate of 10%
3) Please withhold taxes at the rate of X% (enter the % you wish)

My goal is to transfer all the money into the Roth IRA and then I will pay taxes out of my regular income, i.e. money in a bank or whatnot. I'd rather have the full amount transferred into the ROTH, and than pay taxes out of my own pocket instead of having anything withheld. Is this legal and possible and if so should I just choose I elect not to have federal income tax withheld. Also if I choose this option what do I enter as the date effective? I don't want to be hit with penalties. Thanks

Answer 1

Yes, you can pay the taxes without them withholding, excellent idea, but be aware that you may have to pay a penalty as a result if you do not file and send estimated payments. There is an IRS rule that if the amount you owe in taxes is more than I think it is 10% of what you paid, they penalize you.

Now also be aware that if you have a great deal of money in your traditional IRA, tranfering it all in one year may bump you into a higher tax bracket also. That will not be a pleasant experience.

You do not have to transfer it all at once. You can perform the transfer over a number of years so as not to be screwed by your wonderful uncle.

I just last year did a transfer of a portion of mine. I will transfer some more this year and next.

Answer 2

When you take a distribution for a Rollover and you have Federal Income Tax withheld, you can make up the difference out of your pocket, As long as you Rollover the same amount that is distributed to you within 60 days, the IRS is not concerned with the actual source of the funds you Rollover. You can make estimated quarterly payments for the withholding taxes or if you chose to have it withheld you can make it up on the Rollover

Publication 590

Answer 3

Tick the "do not withhold" box and then you'll get to pay the whopping fines and penalties out of your own pocket.

I do believe you enter the effective date as the date the trade went through and not the date you say "go". Most have a day or so lag as sales are made at end of day and not posted immediately to/from your account.

You will have penalties if you aren't at the minimum age to take disbursements from your traditional IRA

Answer 4

If you are not touching the funds yourself, withholding is optional. You have to pay the tax, but if you have sufficient personal funds to do that you do not have to have anything withheld.

If a significant amount of money is involved, you need to figure out the tax you will have to pay on the distribution based upon your personal circumstances and make an estimated payment using form 1040ES to avoid any penalty for underpayment of taxes.

Answer 5

It sounds like you have an IRA distribution form not the Recharacterization form. Call your broker and make sure you have the correct form. Moving the IRA to a Roth IRA is a taxable event (I did it a few years ago) and to my knowledge, the taxes must be withheld at the time of recharacterization. Good luck.