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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: converting to Roth IRA Date: 8/20/1999 2:33 PM
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Greetings, Audrey, and welcome. You wrote:

<<I need to make several changes to get started with the foolish four. I have about 4 or 5 mutual funds with a broker in a regular IRA. I want to convert to a Roth, sell the mutual funds, get with Waterhouse,(are they O.K?),and invest in the four on line. What is the best way to do this, and do taxes have to come out of the account or can I pay them at the end of the year? >>

Others have already answered your questions, but I'll address the tax issue in more detail. Generally speaking, you should not pay the taxes out of the converted amount. First, if you're younger than age 59 1/2, then the amount you use to do that will be considered an early withdrawal. Therefore, you will pay taxes on the entire IRA you convert plus a 10% penalty on the amount you use to pay the tax bill. For details on what happens, see my analysis on conversions in this folder at http://boards.fool.com/Message.asp?id=1040013000441002&sort=postdate.

You should pay the taxes due from other assets, thus letting the entire amount you're converting compound tax deferred. Additionally, don't wait until the end of the year to do so. Instead, you should project your income taxes for the year based on that additional income. See if your withholding through your job will cover that bill. If not, unless you make an estimated income tax payment based on that added income, you could end up with a penalty at the end of the year for a failure to make those estimated withholding payments on time. It can be avoided if you know positively that you will withhold at least 90% of the amount due in taxes for 1999 or 100% of the taxes you paid in 1998. Otherwise, the penalty will apply.

Regards..Pixy
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