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Author: TMFTaxes Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121592  
Subject: Re: Roth-payment of taxes out of it Date: 2/13/1998 2:03 PM
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[[For conversion in 1998, how is payment of taxes handled? Since Roth distributions would be
heavily penalized (I assume even to pay the tax over four years), I assume you have to "hold back"
IRA funds to pay the tax, paying the tax and penalty each year for four years. Has IRS made an
exception by allowing you to take out Roth distribution to pay this four year tax? Also, for we who
must file estimated taxes, do you have to pay equal amounts of the tax in the quarterly payments, or
can you wait until April 15th to pay the entire amount of the tax due, without risking an
underpayment penalty? Thanks.]]

The payment of taxes will be determined however you can make the payment. If you have other (non-rollover) funds with which to make the tax payment, you are far better off that taking the tax payments out of the IRA, paying the tax and penalties immediately, and paying the tax. Of even taking the payments out of the Roth IRA in future years and subjecting yourself to a potential 20% penalty on the withdrawals.

Which is why the conversion question is so thorny. Any computation that you make regarding conversion will have to factor in the lost earnings from the source that you will use to pay the tax. And there is no provision to allow you to take funds out of your regular IRA or Roth IRA, without penalty, to pay the tax assessed over the 4 year period.

Finally, the additiona tax assessed over the 4 year period will be subject to the underpayment penalty rules. So you MAY be required to file estimated taxes in order to avoid the underpayment penalty.

You might find my posts on the Roth IRA (in the Fools School Area...Taxes FAQ section) helpful in understanding the taxation and penalty issues. You might want to read the articles. In addition, in the Taxes FAQ area, there is a post regarding the requirements and loopholes regarding estimated taxes. You might also want to read that post.

TMF Taxes
Roy
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