IRA Rollover

Archive for April, 2006

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

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: 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.

Self Directed IRA Custodian Sunwest Trust, Inc FAQs