state tax on roth conversion

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kongmen

Recycles dryer sheets
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Dw and I will be converting an amount of cash held in a traditional ira to a roth ira for the first time. We are in the 22% tax bracket so we will have the online broker withhold 22% for federal tax. We're not sure how much to designate for taxes in the state of Ohio. On the roth conversion form it asks to designate an amount for both. We see that the income tax rate for Ohio is 3.8 %. Do we enter 3.8 % into the space provided for state withholding?


Edit: I'm sorry I didn't mean to say that we would have them take the funds out of the cash in the traditional ira for taxes (I removed that statement from above). What we want to do is pay the taxes at the same time that we do the conversion from funds not in the ira but cash on hand. In order to have the online broker withhold the taxes from cash outside of the ira I guess I need to direct them to the cash held in our non retirement investment account which we have with them correct?



Thanks for any replies.
 
Last edited:
My approach is to convert in December, after the tax software is released. I do my taxes with estimates and see how much I owe both federal and state. Those are the values I pay.

If you want to convert now, you can use the current tax software or a tax estimator.

You will probably get advice to convert it all, without withholding, and pay the tax out of other funds, if you can manage that.
 
I would just increase the estimated tax payments that are done normally by whatever amount the conversion will create in additional taxes.

Say you convert $44K at 3.8% that is $1,672 in extra tax for the State. So add $418 to each estimated State tax payment.
On the conversion form tell the broker to NOT take out State taxes.

Can do the same for the Fed taxes.

I probably should have asked, aren't you doing estimated tax payments ?
 
In my experience with Roth conversions, they can only withhold from the Roth conversion... they can't withhold from other sources.

If you have other income sources that you can instruct to withhold federal and state income taxes, then adjust those withholding upwards to cover the federal and state taxes on the Roth conversion,

If you don't have other income sources that you can instruct to withhold federal and state income taxes, then just send in estimated payments to the feds and the state.

At your income level I would use 4% for Ohio rather than 3.8%.
 
How to pay Taxes

Not to hijack the thread but the OP hinted to the fact that conventional wisdom is not to pay the taxes using converted money but to use "other" money and keep 100% of the Roth conversion cash. Can someone explain what difference it makes?

thanks
Brian
 
ScotsmanUS said:
Not to hijack the thread but the OP hinted to the fact that conventional wisdom is not to pay the taxes using converted money but to use "other" money and keep 100% of the Roth conversion cash. Can someone explain what difference it makes?
Click to expand...
The difference is having the total conversion amount in the Roth, never to be taxed again, along with a reduced taxable balance that will lead to reduced taxes from taxable gains in the future.

Otherwise, one has a smaller amount in the Roth and an unreduced taxable balance, leading to unreduced taxes from taxable gains in the future.
 
ScotsmanUS said:
Not to hijack the thread but the OP hinted to the fact that conventional wisdom is not to pay the taxes using converted money but to use "other" money and keep 100% of the Roth conversion cash. Can someone explain what difference it makes?

thanks
Brian
Click to expand...

Effectively, it is a way to move money from non-tax-preferred savings (like a ordinary savings account) to a tax-free account (Roth).
 
Yup, more money in tax free and less money in taxable is better than less money in tax-free and more money in taxable, all else being equal.

If the Roth conversion is beneficial to begin with... paying lower tax now to avoid paying higher tax later... then paying the tax with taxable account money amplifies the benefit somewhat.
 
Sunset said:
I probably should have asked, aren't you doing estimated tax payments ?
Click to expand...

Not the OP, but I have always wondered about this. If you don't do your conversions until December do you have to pay taxes quarterly? I can see in our future most of our taxes due will be from conversions, for a number of years anyway.
 
SJhawkins said:
Not the OP, but I have always wondered about this. If you don't do your conversions until December do you have to pay taxes quarterly? I can see in our future most of our taxes due will be from conversions, for a number of years anyway.
Click to expand...

You can just have taxes withheld from the conversion amount. No need for quarterlies.
 
I've paid just one "quarterly" payment and directed the tax software to let me calculate penalty (filling out the lumpy income form) to alleviate the penalty.
 
SJhawkins said:
Not the OP, but I have always wondered about this. If you don't do your conversions until December do you have to pay taxes quarterly? I can see in our future most of our taxes due will be from conversions, for a number of years anyway.
Click to expand...
You might have to fill out form 2210 to show that large chunk of income was in Q4. Otherwise the IRS assumes your income was steady throughout the year.

Why wait for December? Since generally the market goes up, wouldn't it be better to convert a safe amount relative to your target early in the year, and top it off at the end? Then you could make four even quarterly payments to either match your target or reach safe harbor based on last year's taxes.
 
kongmen, hopefully your retirement account is not at Vanguard. Vanguard will not withhold OH state income tax.
 
RunningBum said:
You might have to fill out form 2210 to show that large chunk of income was in Q4. Otherwise the IRS assumes your income was steady throughout the year.

Why wait for December? Since generally the market goes up, wouldn't it be better to convert a safe amount relative to your target early in the year, and top it off at the end? Then you could make four even quarterly payments to either match your target or reach safe harbor based on last year's taxes.
Click to expand...

Yes, I do most of mine in January based on an estimate of my tax situation for the year and then I top it up in December. I have a pension so I just set my federal income tax withholdings such that they withhold what I expect to pay in taxes.

Then this year, I had a small $17 refund, but then made an additional estimated payment of $4,983 to increase my refund to $5,000 and then I used my refund to buy $5,000 of paper i-bonds.
 
oldtimer said:
kongmen, hopefully your retirement account is not at Vanguard. Vanguard will not withhold OH state income tax.
Click to expand...

Are you sure? When we were Vermont residents they could withhold both federal and Vermont state income taxes.
 
braumeister said:
You can just have taxes withheld from the conversion amount. No need for quarterlies.
Click to expand...
If you are under 59.5 the withholding part will be considered an early withdrawal, and you'll be penalized.
 
RunningBum said:
If you are under 59.5 the withholding part will be considered an early withdrawal, and you'll be penalized.
Click to expand...

unless you replace it within 60 days and you can only do that once every 12 months IIRC.. but why bother... just don't do any withholding and mak and estimated payment for the taxes.
 
Thanks for all the replies.


I should clarify. We want to do the conversion and pay all taxes due at time of conversion with cash from a non retirement account that is held with the same online broker.



When we received the paperwork from the broker it has a section regarding tax withholding so I was thinking that I might be able to have the broker withhold the taxes from the cash in our non retirement account which they hold.


We don't want to have the taxes withheld from either the Tira or the Rira.
 
Is there a list of what states charge a tax on roth conversions? Oklahoma what i been looking for.
 
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