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It is currently Thu Jul 24, 2014 3:44 am




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 Post subject: Roth Conversion Question
PostPosted: Sat Feb 23, 2013 12:19 am 

Joined: Sat Feb 23, 2013 12:09 am
Posts: 35
I have $23k in a rollover IRA and $5k in a Roth IRA. I am a full-time student and will not start working this year until May or June, so my tax rates will be 15% - federal and 5.6% - state. I want to convert the full $23k to a Roth, but I don't have $4,700 in cash to cover the tax liability. Should I use funds from my Roth IRA to cover the tax liability on the conversion? The $4,700 from the Roth will be solely contribution dollars, so there will be no tax or penalty. Any thoughts will be appreciated.


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 Post subject: Re: Roth Conversion Question
PostPosted: Sat Feb 23, 2013 6:43 pm 

Joined: Sat Oct 20, 2012 7:20 pm
Posts: 21
The standard advice is not to do the Roth conversion unless you have the funds to pay the taxes already in hand...

Any way you can stash the cash in a savings account, building it up so you do have it by Apr. 15th, 2014?


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 Post subject: Re: Roth Conversion Question
PostPosted: Mon Feb 25, 2013 11:34 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Shalom from the holy land.

Can not pay taxes out of Ira's without doing a distribution. Technically speaking, you could do the conversion, and if your current $5k is all contributions made straight directly to a Roth Ira, you can take a non-qualified distribution and Roth ordering rules put these contributions first, tax and penalty free.

I don't know your personal situation, but you should calculate the value lost of essentially reducing your basis on which many years of compound like growth can do its magic. My suggestion would be to convert what you can afford without drawing on your retirement accounts or up to the top of the 15% tax bracket, whichever is lower. Just my 2 cents. Conversions can be recharcterized, so if you think you will take this path, best to study up on recharc rules as well before you take the proverbial plunge. Good luck.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Roth Conversion Question
PostPosted: Mon Feb 25, 2013 11:37 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
sandrark wrote:
The standard advice is not to do the Roth conversion unless you have the funds to pay the taxes already in hand...

Any way you can stash the cash in a savings account, building it up so you do have it by Apr. 15th, 2014?


Conversions need to be done by Dec 31 of the year you are doing it. For 2013 tax year, this is 12/31/2013.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Roth Conversion Question
PostPosted: Mon Feb 25, 2013 1:23 pm 

Joined: Sat Feb 23, 2013 12:09 am
Posts: 35
I went ahead with the conversion. Considering my 15% marginal tax rate this year and the fund that I'm in being near its 52 week low at $14.37 (52 week high $22 range), I couldn't help myself. I even withheld 15% from the converted amount to cover the federal tax. I know that's not advisable, but the 10% penalty is only around $350. I'll now have $28k in a Roth, compared to $23.5k traditional and 8k Roth.


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 Post subject: Re: Roth Conversion Question
PostPosted: Tue Feb 26, 2013 3:24 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
Why don't you reduce your Roth basis instead of paying the penalty? Not that I condone what you're doing. But you might as well minimize your loses.

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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