I am trying to convert some of my regular IRA to Roth. Fidelity has good tool to analyze this. But there is one thing confuses me. There is an selection for how to pay taxes associated with conversion. Is it from IRA (meaning keep portion of the withdrawn funds for tax) or pay it out of other savings. The site keep saying I should pay from other funds. But I would prefer to use funds from IRA, that would help me keep track of how effective this conversion has been.
I can can withdraw without any penalty -over 59.5 old.
Any opinions?
You can pay the tax from any source you want. Understand that if you withdraw from an IRA to pay taxes owed, then that IRA withdrawal will also be taxable - the taxes are due next April 15 and can be paid at that time if you want - you do not have to withhold tax at the time of conversion - fidelity will send forms to both you and the IRS showing what you did.
Excellent points. Now given what you say it perfectly makes sense to do this early in the year. Unfortunately that train has left the station long ago for this year. I will certainly consider this for next year.
I love your strategy of keeping the stocks separate. I was assuming the entire market will crash, I have until Oct 15, next year to recharacterize. But it does not have to be the entire market I suppose. It is a big hassle to keep multiple accounts though, but its just a spreadsheet to keep track of these. Also after couple of years, I can combine them I suppose, at that point it cannot be recharacterized. I also did not realize I can do multiple conversions in 1 year. I thought there is a limit on number of conversions.
I see all your points. If I convert bunch of index funds, do you see any advantage in keeping them separate? For example, if I have ITOT and VTI, I assume they will go up and down together. But on the other hand the very fact I have two different funds is to ensure diversification. In that case separate account does make sense.
Thanks for the wonderful pointers
You are very welcome. Will answer your questions in more detail after the weekend. Have some more comments and suggestions. No time now. On my way to Europe today.
Systems101, I have one additional question. When I do Roth conversion, will Fidelity let me do in kind transfer? Or do I need to sell those equities and buy them again in Roth?
You can do in kind transfers. I actually like doing in kind transfers on stocks that may be beaten down, so when the tax comes due, I typically have already made the tax back from my gains on the rebound.
It is NOT the same as leaving it in the traditional IRA because, in a traditional IRA, you are forced to take minimum required distributions! The net result in $ may be the same but if you have a large traditional IRA you may be forced to take more out than you want to.
Please note that that the ability no longer is allowed in the new tax bill.