What Should The Roth Ira Direct Conversion Request Withholding Election Date Be?
Re: Direct Conversion Request form for a Rollover IRA to Roth IRA conversion:
Want to pay the conversion taxes out-of-pocket & NOT from the Rollover IRA. It’s correct to “elect not to have Federal income tax withheld”, Right? Please someone who knows confirm for me & when is the estimated tax payments due to avoid penalty?
What should the effective date be?…..the date the form was completed, or is there some other date or strategy to consider. FYI, in case this matters:
• account was originally a 401k from a part-time job
• account consists of approx $150 cash, $6K in stocks–1 short-term & 1 long-term, both of which prefer to keep; and, 1 more small, long-term not sure to liquidate or not. Is it best to liquidate before or after conversion & why, or does it make a difference?
Can contributions to a Roth IRA be with Schedule B (interest income), C (profit from business), or D (cap gains) income? Account owner is not employed.
Any help is greatly appreciated! Thank YOU! 
If you want to pay the taxes “out of pocket” from your conversion from a Rollover IRA to a Roth IRA, then you would elect NOT to withhold taxes at the time of the transaction. You will then be subject to pay those taxes once you file your federal return for the year in which the conversion takes place.
The IRS does not know actual dates as to when retirement plan transactions occurs, only the year. So the effective date is not of importance.
Contributions to ANY IRA plan can only be made with earned income (i.e. income reported on a W-2) and cannot be made with passive income such as interest, rental property, etc.
Also you cannot make contributions to ANY IRA if you are not employed or have no actual earned income. Unless you have a spouse who is employed and can make contributions on your behalf (AKA Spousal IRA)
Have you consulted with a tax preparer before deciding to make this conversion? As there are certain AGI limits in order to have a Roth IRA.
I only deal with cash funds, so I couldn’t answer your question re: liquidation of stocks. Sorry.
You’re right to elect NOT to withhold estimated taxes when making this transaction. Just make sure you move the 401k into your Roth IRA within a 60 day period if you’re taking possession of the funds yourself rather than performing a direct transfer.
You should pay the taxes with your regular tax return.
ocbe,
you mention that the effective date of conversion is not of importance, only the year. Does this mean that you could decide to “convert in hindsight” on the day that your Individual IRA had its lowest value in 2010 and only pay taxes for that amount? This seems too good to be true. Or is the tax based on the value of your IRA on the last day of 2010, regardless of what day you actually did the conversion?
thanks for any insight.
Pat