Taxable Roth conversion planning is all the rage, particularly in early retirement. But a question emerges: how do you pay the federal and state income tax due on the Roth conversion.

00:00 Introduction
01:04 Under Age 59 1/2
03:14 Age 59 1/2 and Older
04:37 Paying the Tax on a Backdoor Roth IRA

To be clear, at 02:21 one could consider using an inherited traditional IRA or inherited traditional workplace retirement account prior to age 59 1/2 to pay the tax on a Roth conversion. But using one’s own traditional IRA or traditional workplace retirement account is not likely to make much sense in most cases due to the 10% early withdrawal penalty.

The IRS has a website that is great for making quarterly estimated tax payments:

Fidelity has a helpful PDF document on IRA distribution withholding here:

I previously discussed why I don’t like having any part of a Roth conversion withheld on here:
I blogged about the Backdoor Roth IRA here and here

This video, the show notes, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)

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A Roth conversion can be a smart financial move for some individuals looking to lower their tax burden in retirement. However, one important aspect to consider when completing a Roth conversion is how to pay the income tax on the converted amount.

When you convert funds from a traditional IRA or 401(k) to a Roth IRA, the amount you convert is considered ordinary income for tax purposes. This means that you are required to pay income tax on the converted amount in the year that the conversion takes place.

There are a few options available for paying the income tax on a Roth conversion. One option is to have the financial institution that is holding your retirement funds withhold the necessary taxes from the conversion amount. This can be a convenient option as it allows you to pay the tax upfront and avoid any potential penalties for underpayment when tax season comes around.

Another option is to pay the income tax on the converted amount using funds from outside the retirement account. This can be done by setting aside a portion of the conversion amount in a separate savings account or using funds from your regular income to cover the tax liability. Keep in mind that if you choose this option, you may need to make estimated tax payments throughout the year to avoid penalties for underpayment.

It’s important to note that the tax rate for Roth conversions is based on your ordinary income tax rate, which can vary depending on your overall income level. Individuals in higher tax brackets may face a higher tax liability when completing a Roth conversion, so it’s important to consider how the conversion will impact your overall tax situation.

In conclusion, paying the income tax on a Roth conversion is a crucial step in the process of converting retirement funds to a Roth IRA. By understanding your options for paying the tax liability and planning ahead, you can ensure a smooth and successful conversion that aligns with your financial goals. Consulting with a tax professional or financial advisor can also provide valuable guidance and advice on how to best navigate the tax implications of a Roth conversion.