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Your IRA custodian will likely offer you, as part of the conversion process, the option of having a % of the withdrawn (converted) amount to be sent to the IRS as a tax withholding. Unfortunately, that % is considered part of the withdrawal. So, let's say you do a conversion worth $10,000 and you elect 10% to be withheld and sent to the IRS, your conversion amount will be $9,000 and $1,000 will be mailed by the custodian to the IRS. But the taxable amount will show up on your 1099-R as $10,000. Or, you can elect to pay the tax withholding for the full $10,000 conversion from a taxable account as part of your quarterly estimated tax payments to the IRS.

Interestingly, if you were paying for investment advice and it were charged to you as a % of assets under management, that fee can be paid for with dollars from the IRA and is NOT considered a taxable withdrawal to you.

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