In this column, Dan Moisand explains why it is a bad idea to pay taxes on a Roth IRA conversion using the 401(k) retirement account. When converting a traditional IRA account into a Roth IRA people should pay the taxes on that conversion using a non-retirement account. Roth conversions make the most sense to taxpayers when they expect tax rates to be higher in the future. Another catch with paying taxes out of the retirement account is that the amount of the traditional IRA not being converted into a Roth is treated as a distribution instead of a conversion. If a person is under the age of 59 ½, they would owe a 10% penalty for taking an early distribution.
See Dan Moisand, Don’t pay taxes on Roth conversions with retirement money, Market Watch, October 30, 2015.
Special thanks to Jim Hillhouse for bringing this article to my attention.
