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DanielleCPA
DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 694
Experience:  Years of Experience in Business & Personal Taxes
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recently transferred my traditional IRA to a ROTH IRA and need

Resolved Question:

recently transferred my traditional IRA to a ROTH IRA and need to decide how much state and federal taxes I should withhold. My goal is to maximize my future returns (assuming I am in a higher tax bracket when I retire). what should I decide?
Submitted: 1 year ago.
Category: Tax
Expert:  DanielleCPA replied 1 year ago.

DanielleCPA :

Welcome and thanks for your question!

DanielleCPA :

What state are you in?

Customer:

NYC

DanielleCPA :

Approximately what tax bracket are you in? Do you know if this Roth distribution will bump you into a higher tax bracket

Customer:

not sure, I currently make $100k a year. I think I am already in the 28% tax bracket but not sure if it will bump me up. (current value of IRA pre tax $66 - roughly 45 post tax conversion)

DanielleCPA :

The 28% single tax bracket goes up to $183,250 for 2013. So, if your other income remains constant, you'll still remain in the 28%.

DanielleCPA :

Do you normally owe or get a refund when you file your taxes?

Customer:

oh great. I usually end up paying taxes

DanielleCPA :

You will definitely want to have at least 28% withheld at the federal level - so at least about $18,500 on $66K.

Customer:

I see. I recently read in the following article about common mistakes to avoid when converting that you should not withold taxes when you convert (see #4 in article below) http://www.marketwatch.com/story/avoid-these-roth-ira-conversion-mistakes-2009-12-31

Customer:

why is that?

Customer:

and would that apply to me?

Customer:

what'

DanielleCPA :

Give me a moment to read the article you posted.

Customer:

Of course!

DanielleCPA :

Do you have outside sources of funds that you can cover the $18K federal plus about $6,800 in NYS/NYC taxes?

DanielleCPA :

The idea behind the article, and I agree, is that, if you have outside sources to pay the taxes vs withholding at the source is that you will ultimately have more in the Roth IRA and, in theory, more money that you can withdraw tax free in retirement

Customer:

I see, yes that would make sense given the power of compound interest. but unfortunately i wouldnt have $24k lying around to pay that off =(

Customer:

so you suggest paying the maximum now.. (28%) vs. paying less?

Customer:

could you explain the rationale for me? if I pay more taxes now.. i have less in the ROTH but pay less taxes when i withdraw??? is that correct? but if i pay less taxes now.. i have more in the ROTH and can benefit from the compounding...

DanielleCPA :

Yes, if you pay less taxes now, you will have more in the Roth and benefit in compounding.

DanielleCPA :

You should analyze how much money you think you can comfortably contribute to paying in the taxes at April 15 and withhold the difference.

Customer:

and the benefit of paying now as much as i can?

DanielleCPA :

can you clarify - do you mean withholding now?

Customer:

yes, withholding taxes now (aka paying $18,000 in taxes from the $66k)

DanielleCPA :

The benefit of that would be not having to worry about paying the taxes in later, but as we discussed, you will lose the power of compounding.

Customer:

sorry, im a bit confused... so which one would be better? witholding now or paying later ? when im 59 1/2 under which situation am i better off?

DanielleCPA :

At 59 1/2, you will be better off if you pay later.


 

Customer:

sooooo... do not withhold any taxes now? is that correct? (do you happen to know if there is a minimum that i must withhold or can i defer all payments to the future?)

DanielleCPA :

You can defer all payments to the future, you will just need to communicate that to whoever has your IRA.

Customer:

ah great! that's what I will do then.

DanielleCPA :

Do not withhold any taxes now if are comfortable with paying in all later.

Customer:

thanks Danielle! Very helpful.. off i go ! have a great weekend

DanielleCPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 694
Experience: Years of Experience in Business & Personal Taxes
DanielleCPA and 6 other Tax Specialists are ready to help you

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