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When converting a traditional IRA to a Roth IRA at Fidelity, one is given the choice to either:

  • elect not to have federal taxes withheld and continue my conversion online.
  • elect to have federal taxes withheld.

Is there any upside in electing to have federal taxes withheld during a traditional IRA to Roth IRA conversion?


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Typically, a conversion from IRA to Roth IRA is a taxable event, so you should expect to owe taxes at the end of the year.

Unless you plan your tax load and know what you're doing, this can end with a surprise payment being due to the IRS on Apr/15 the next year, and potentially even a penalty if it is a significant amount.
An appropriately dimensioned tax deduction during the conversion avoids this issue.

Of course, this is typically a bad plan, as you are taking this money out of the IRA.

You should always try to pay potential taxes with other money that is not in an IRA. If you can't, you might reconsider the whole conversion activity.

  • To avoid taking money out of the IRA, and to also avoid the other possible problems mentioned (large payment in April and possible underpayment penalty), you can make an estimated tax payment. – prl Jun 25 '18 at 4:20
  • Thanks for the answer. Just to make sure I get it right: there is no upside in electing to have federal taxes withheld during a traditional IRA to Roth IRA conversion, unless one isn't able to pay the taxes to the IRS on ~Apr/15 the next year? – Franck Dernoncourt Jun 25 '18 at 19:29
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In addition to the reasons that Aganju mentioned as to why having tax withheld on a Traditional-to-Roth IRA conversion is a bad idea, I believe that the tax withheld counts as a premature distribution from the Traditional IRA and thus is subject to the 10% excise tax on premature distributions. For example, if $100K is rolled over from a Traditional IRA to a Roth IRA but $20K of that $100K was sent to the IRS as tax withholding, then the Roth IRA gets only $80K deposited into it to grow tax-free in the future. On the other hand, as far as the tax man is concerned, you rolled over $80K from Traditional IRA to Roth IRA and took $20K as a premature distribution from your Traditional IRA. At the end of the year, your taxable income is increased by $100K and you owe Federal income tax (and perhaps State income tax as well) on that $100K, plus you owe $2K as Federal excise tax on the $20K premature distribution. To cover these additional taxes, you have $20K of withholding that has been set to the IRS and so that most likely will cover any estimated tax payments that you are otherwise expected to make in order to avoid penalties for insufficient payment of estimated tax.

  • Thanks for the answer. Just to make sure I get it right: there is no upside in electing to have federal taxes withheld during a traditional IRA to Roth IRA conversion, only downsides as the one you mentioned in your answer? – Franck Dernoncourt Jun 25 '18 at 19:30
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    Yes - except if you don't trust yourself to be able to pay potential taxes later, because you consistenly splurge all your money away. Legally, they are required to offer it, but it is financially always a poor decision to take it. – Aganju Jun 25 '18 at 20:30

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