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<<I'm about to convert my regular IRA (held by DLJdirect) to a Roth. There's a spot on the conversion form you can check for:
(1) Withhold no Federal Income Tax.
(2) Withhold ______% of the conversion amount for payment of Federal Income Tax.
(3) Withhold $_______ for payment of Federal Income Taxes.

Now, from this I gather that I can use funds in the IRA to pay the taxes that are going to be required over the next four years for this conversion, right? This makes sense, because I'd like the IRA to pay for itself and it's done very well -- it can pay these taxes just from returns it's made in the market, not from principal I've invested, and I'll still be ahead.

Here are my two questions, please sir:
(a) Am I right that by using one of the above withholding options I can have the taxes paid out of the money in the IRA itself (and not have to somehow pony up four years of additional money to pay these taxes)?
(b) Is there an advantage to option 2 over 3 or vice-versa? In other words, is it better to say 28% (my bracket) in the percentage option or to figure out what 28% should be and use a dollar amount?>>

You can do (2) or (3), but I don't recommend it. If you remember the piece I posted on 1/31/98 under the subject "Roth Contributions and Conversions," you will come out on the short end of the stick. The money you keep for taxes will be assessed an early withdrawal penalty of 10%. All else being equal, you'll never make up that loss, so you're better off not converting at all. Go back and read that series of posts and you'll see what I mean.


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