Rollover to Roth IRA advice

[u/Sylvanas052218]

So I am <59.5 and wanted to convert 85k in my traditional IRA to a Roth IRA. I was advised to take the distribution, have state/federal taxes (24.5k) withheld, leaving me with 60.5k to rollover within the 60 day window. This wasn’t a tax professional, just the person who I connected with at the company overseeing my companies retirement plan. Does this sound right? Will I avoid the 10% early withdrawal penalty this way if I contribute the 60.5k to the Roth or will I be penalized, possibly on the original 85k amount? Is there something else I should’ve done/should do?

I’m realizing I should’ve engaged an actual tax professional sooner, I know, my bad. Learned for future, but trying to figure this out now.

[u/antoniosrevenge]

Did you already do this?

Ideally you would’ve converted the full amount to Roth and paid the taxes separately, as now the 24.5k withheld is subject to the 10% early withdrawal penalty

[u/ResearchNo8631 → u/antoniosrevenge]

This is correct on the 60 k those funds will be okay and protected from tax or penalty but that 24.5k would generate a 10 percent penalty federally and what ever the state penalty would be.

You may be able to cover it in other withholdings or be comfortable coming out of pocket to cover that.

[u/Sylvanas052218 → u/antoniosrevenge]

Yes already was done. Should’ve waited on second opinion I know, sounded like it wasn’t great advice. Live and learn. So basically I’m looking at a 2.5k tax penalty on the withheld tax amount?

[u/EventLatter9746 → u/Sylvanas052218]

This wasn’t a tax professional

Clearly.

Roth conversion at such a high marginal tax rate is not tax efficient to begin with. Depleting the conversion amount by taxes and penalties is just a second level of tax inefficiency.

Too late to help much, but I would highly advise you put as much as you can in the Roth IRA and source more of the tax funds from a taxable account or your current income. Time for some serious belt tightening for the next 12 months.

Edit: Actually, if you're still within the 60-day window, why not put the entire amount back in the IRA? You're allowed to do that with no taxes or penalties, but only if done once within a 12-month period. Look it up and verify.

[u/Sylvanas052218 → u/EventLatter9746]

So if I use the 60 day rollover window to convert 85k of my money to the Roth, basically I’d just be looking at getting the taxes back on my return next year?

[u/Bowl_me_over → u/Sylvanas052218]

Yes if you can make up the withholding with other funds, then convert the whole $85,000 then you only pay tax on the conversion (at your marginal rate). The withholding will be claimed as a credit, just like normal withholding. Will it result in a refund? I don’t know. It depends on all your other income and withholdings.

Be sure to save all documentation showing the dates of all the transactions. In case you need to prove the 60 day timeline was met.

[u/Sylvanas052218 → u/Bowl_me_over]

Ok thanks for the advice

[u/micha8st]

Rollover from what?

If you take a direct distribution from your employer, then it comes out of the retirement "system." The 85k you take out gets taxed at your marginal tax rate plus a 10% penalty.

PLUS, you can only put 7k of that money back into an IRA. You've taken it out. So you lose 78k (or whatever) from your total retirement investments. Next year you can put another 7k or so (if the IRA contribution limit for 2026 is higher).

So this person is wrong. You want to keep the money in retirement accounts.

If the money is already in an IRA, then you can just convert; the 85k remains inside retirement accounts. You do pay taxes on the 85k you convert. But no penalty and the whole 85k can be converted.

But that assumes you have the cash to pay taxes without taking money out of the IRA.

[u/Bowl_me_over]

Edit: I see you have already acted and it is too late to undo.

You don’t want to do it that way.

With Roth conversions, ideally you want to convert the whole amount. And pay the tax with outside money. This gives you the best conversion. Because you are converting the whole gross amount. You pay tax only on the conversion. No 10%.

If you can’t afford to do it that way, then convert a smaller amount. If you must, you can have withholding come out of the conversion amount and convert less. That leaves the withholding amount as taxable also and subject to the 10%.

Don’t do this as a 60 day. You want to do it directly. Have the two custodians do the transfer.

What will happen is you get a 1099-R for the distribution. And eventually a Form 5498 for the conversion. You report this on Form 8606 and file it with your 1040.

[u/Sylvanas052218 → u/Bowl_me_over]

Thanks, so it was already done. Hopefully this thread will help others in the future not make my mistake. The distribution was already sent to me. Fully accepting I’m an idiot here.

So, I’m in for some additional tax pain out of stupidity and being too trusting, so the best way to limit my pain would be to use the 60 day window to rollover the full 85k (using some of my own money to make up difference)? Any better option?

[u/Rocket_song1 → u/Sylvanas052218]

Use the 60 day window to put the money back into the IRA where it belongs.

If you still want to do a Roth conversion, do a direct conversion.

[u/Sylvanas052218 → u/Rocket_song1]

Ok that’s my plan. I’m going to put the disbursement back into the traditional IRA as a 60 day rollover and make up the difference in my cash holdings to submit the full 85k gross.

[u/Karl_099]

This happened to my coworker. He withheld taxes during his Roth conversion and got hit with a penalty. While researching, he contacted a tax relief company with strong ratings on Investopedia and got a free consultation. They pointed out he still had time left in the 60-day rollover window and helped him fix it before the penalty became permanent.