Mar 21

Question by Sterling J: In my case, can I take the owed taxes from the Roth IRA to pay the taxes due without incurring penalties, etc?
I converted a Traditional IRA to a Roth IRA. The federal taxes were withheld – all is well with that (I think). The state taxes were not withheld. Now I owe the state a bunch of money. Can I take the owed amount (or less) from the Roth IRA to pay the taxes due without incurring penalties, etc? Would this be considered a “premature withdrawal”?

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Answer by
Don’t do it.
Yes it would be premature withdrawal.
You know you can undo the conversion? And convert part of the money this year and part next year. Up to 4/15 you can.

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2 comments so far...

  • IG64 Said on March 21st, 2011 at 6:32 pm:

    you would see premature withdrawal penalties. Once the money enters an IRA of any kind it will incur a hit when you take it out early.

  • eldon Said on March 21st, 2011 at 6:44 pm:

    Yes, if you are over age 59 1/2.

    If you are under age 59 1/2, the answer is more complicated.

    If you had previous regular annual contributions in your Roth IRA that you have not yet been withdrawn, then you can withdraw them at any time for any reason without penalty.

    However, if the only contributions to your Roth IRA came from the conversion, then you have to wait at least 5 years or until you turn 59 1/2 (whichever comes first) to take a penalty-free withdrawal. If you withdraw part of the converted amount (for any reason) it will be subject to the 10% penalty, but not to income taxes, until after the 5-year waiting period has passed.

    From an investment standpoint, it is almost always a bad idea to take money out of your IRA to pay taxes. It is also a bad idea to have taxes withheld from a conversion. It is a better idea to convert a smaller amount that you can afford to pay taxes on with outside money.

    The problem is that the amount withheld for taxes will be treated as a distribution from your IRA and be subject to both income taxes and the 10% penalty if you are under 59 1/2. (Yes, you have to pay taxes on the amount taken out for taxes!) And it will reduce the amount of money growing in your IRA.

    Another person suggested undoing the conversion. This is possible. But, unfortunately, since you had part of the conversion withheld for taxes, you cannot undo the withholding. For example, if you converted $ 1000, but had $ 200 withheld for taxes, that means you really only converted $ 800 and can only “unconvert” the $ 800. If it has been less than 60 days, you could replace the taxes with money out of your own pocket. But if it has been more than 60 days, you are out of luck.

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