In My Case, Can I Take The Owed Taxes From The Roth Ira To Pay The Taxes Due Without Incurring Penalties, Etc?

Sat, Feb 6, 2010

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”?

What Taxes Are Owed On Income Received From A Natural Gas Lease? I will receive a check from a natural gas exploration...
I Have Paid State Taxes In More Than One State This Year. How Do Take Care Of The Situation? I have NM state taxes withheld from my pension. This...
What Determines My Taxes Owed For The Year? This year I owe 1300 and I was wondering if...
I Owe A Small Amount Of Taxes From Last Year And The Year Before. How Much Are The Penalties Around? The taxes i owe are not much maybe a couple...
When Making Estimated Tax Payments To The Irs, Do I Need To Include An Amount To Cover Self-employment Taxes? I am a self-employed consultant as of this year, so...

Related posts brought to you by Yet Another Related Posts Plugin.

Case, from, Incurring, Owed, Penalties, Roth, Take, Taxes, Without

This post was written by:

admin - who has written 164 posts on IRS Tax Relief.

Contact the author

3 Responses to “In My Case, Can I Take The Owed Taxes From The Roth Ira To Pay The Taxes Due Without Incurring Penalties, Etc?”

eldon Says:
6. February 2010 at 10:49 am

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If you had previous regular annual contributions in your Roth IRA that you have not yet been withdrawn, then you can withdraw them at any time for any reason without penalty.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

chatspla Says:
6. February 2010 at 10:49 am

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.

IG64 Says:
6. February 2010 at 10:49 am

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 Says:
6. February 2010 at 10:49 am
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.
chatspla Says:
6. February 2010 at 10:49 am
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.
IG64 Says:
6. February 2010 at 10:49 am
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.

Click here to cancel reply.

IRS Tax Relief