There is no doubt we have written about this topic in past Slott Report entries. Possibly many times. There is also no doubt that people continue to have Roth conversion confusion, over and over again. When a person does a Roth conversion, that transaction will be taxable, and there is no way to reverse the decision to convert. You cannot un-ring that bell or put the converted Roth toothpaste back into the traditional IRA toothpaste tube. What’s done is done. We could quibble over the pro-rata rule and how much of the conversion is taxable, but that is not the point of this article.

Assume no after-dollars exist and this is a 100% taxable matter.

It is our advice to pay the taxes due with other, non-qualified assets – like money from your checking account. This way the entire amount of the conversion moves into the Roth IRA, and the entire amount begins to grow tax-free. However, not everyone has extra cash on hand to pay the conversion tax. So, another option is to pay all or part of the tax from the IRA – via withholding. For example, if I convert $100,000, the entire $100,000 is taxable. If I elect to have 20% withheld for taxes, only $80,000 moves into my Roth IRA. When tax time arrives, I will have already sent $20,000 to the IRS. Understandably, this softens the tax blow come April.

In and of itself, the above is not a problem. The trouble occurs when taxes are withheld on a Roth conversion for a person who is under 59 ½ years old. What is the issue? Taxes withheld on a Roth conversion are not converted. Technically, the withheld dollars are a standard withdrawal that is sent to the IRS. For anyone under 59 ½, an early withdrawal is subject to a 10% penalty (assuming no other exception applies).


John is 35 years old with a traditional IRA worth $100,000. John discussed the possibility of a Roth conversion but was concerned he did not have the extra funds available to cover the taxes due on the conversion. John’s advisor suggests having the taxes withheld from the IRA. This is bad advice, but John is unaware of the consequences. John converts the entire $100,000 and has $20,000 withheld for taxes. This $20,000 never gets converted. It is an early withdrawal, and John is hit with a 10% penalty of $2,000. John is furious. He contacts his advisor, but the call goes to voicemail. Ironically, John’s advisor is sitting in the crowd at an Ed Slott advisor training program. He is simultaneously turning ghost white as the speaker implores the audience to never have taxes withheld on a Roth conversion for anyone under 59 ½, for all the reasons discussed above.


By Andy Ives, CFP®, AIF®
IRA Analyst

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