davef, will the taxes be paid with taxable money or from tax-deferred money (IRA withdrawal or part of the conversion)?[/
I saw on another post that the best approach would be to pay with taxable money. But, I would be interested in your thoughts. I can manage the payment either way. Thanks
Yes paying the tax from taxable is beneficial because you are putting more in the Roth where gains are tax free compared to leaving the funds in taxable where the gains are taxable. You can do some simple examples that illustrate this.
Suppose you have 100K in TIRA and are in 22% bracket and will be in the same bracket when you withdraw funds from TIRA.
1) Leave funds in TIRA. After some yrs, the TIRA doubles to 200K. Withdraw the funds and pay 22% tax (44K) and you end up with 156K.
2) Withdraw 100K from TIRA. Pay 22% tax (22K) from the from the withdrawal and you end up w/ 78K to convert to Roth. After some yrs, this doubles to 156K ...........the same as in 1) where you left it in TIRA.
Now suppose you have 22K in taxable acct and the 100K TIRA.
3)Convert TIRA to Roth. Pay tax from TIRA withdrawal as in 2) above. You end up with 78K in Roth and still have the 22K in taxable. After some yrs,
they both double.........The Roth to 156K and taxable to 44K. The taxable account after paying 15% tax on the gain (22K)= 44K - 3.3K for a total of
200 - 3.3K.
4)You convert TIRA to Roth and pay tax from the taxable account leaving you
with 100K in the Roth and 0 in taxable. After some yrs, the Roth doubles to 200K. You are ahead of 3) by 3.3K. Of course, if your situation is that LTCGs are taxed at 0%, then there will be no difference between 3) & 4).
You can change the tax rates to fit your situation. The conclusions should be the same.