Solved

Roth IRA and income tax

Forum|Forum|5 years ago
August 27, 2020
1 reply
0 views

I would like to double-check with you on this, though I asked some of you before.

To put it simply, I'm going to transfer $25,000 from my retirement plans (401K) to Roth IRA.

I've got two options: 20% federal tax now or withholding it until the tax-filing time next spring.

The thing is even with the addition of $25,000 to my annual income, I'm still in the 12% federal tax brackets.

Do you think I can get more benefits from paying the tax later (in the 12% brackets) than paying the federal tax (20%)?

TurboTax Self Employed Online

Best answer by VolvoGirl

When I fill out the online form on this transfer to Roth IRA, I see three options:

1) default federal tax (20%)

2) fixed percent (must be above 20%)

3)do not withhold taxes

So, when I asked my pension compay, they say if I choose 1), the ACTUAL l amount to transfer to my Roth IRA is $20,000 ( $5,000 withheld).

This is where I got confused. According to your explanation, my pension company withholds $5,000 to pay for federal taxes later, but the actual amount to transfer to Roth IRA is still $25,000, not $20,000 now?

The taxable DISTRIBUTION is still 25,000. The transfer is only 20,000. But you can add back in the 5,000 with your own money from your checking account, etc. to replace the 5,000 so the whole 25,000 gets into the ROTH IRA. I think you have 60 days to make the deposit.

macuser_22

@cspyon - You asked the same question here and it was fully answered and discussed. What do you not understand?

https://ttlc.intuit.com/community/retirement/discussion/re-tax-implications-on-the-conversion-of-traditional-ira-to-roth-ira/01/1710805#M111403

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

C

cspyonAuthor

Okay, for the sake of calculation, let me put it this way.

If I pay 20% federal tax of $25,000, it's $5,000.

Say I add this amount to my estimated income of $30,000, for example. Now, it's $55,000.

As I pay the federal tax upfront, the actual amount to convert to Roth IRA is $20,000.

Then, my total estimated income is $50,000, which puts me in the 12% federal tax bracket.

Here, my tax is $6,000 ($50,000 divided by 0.12). But as I have paid $2,000 upfront in federal taxes,

the total taxes I would pay would be $8,000.

Now, let me withhold the federal tax and add the whole contribution ($25,000) to my estimated income.

It's now $55,000, which puts me in the 12% federal tax bracket.

So, 12% of $55,000 (assuming I withhold the federal tax) is $6,600.

In other words, $8,000 vs $6,600, to put it simply. Withholding is more beneficial to me, isn't it?

Am I right or wrong?

VolvoGirl

One thing you missed is in both scenarios you took out 25,000. 25,000 is added to your income. It's not how much you contribute to the ROTH IRA but the total withdrawal whether you take out withholding or not. So your income is 55,000 both times.