Paid first year tax for 98 conversion through penalty-free withholding from converting account. Planned to pay rest of tax with cash flow from paycheck over 4 years. Overestimated cash flow from paycheck. Now in 2000, more tax installments due, no money, need to dip into Roth to pay taxes. Since rules let me pay some tax on conversion with proceeds from converting account without penalty then (TY1998), it seems logical that I could now (TY2000, 01, 02) pay the IRS more taxes with money from same account.

Question is: Now (2000, 01, 02)can I send tax $ to IRS with money that is taken from 98 converted account without incurring penalty?? What's best for me to do?

There was no provision in '98 letting you take money out penalty free to pay income tax, and there is no provision for this year. Perhaps you met a different exception, like being over 59½.

Otherwise, if you withdraw money now to pay taxes, you owe a penalty and you accelerate the reporting of the 4 year spread.



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Barry Picker, CPA/PFS, CFP
New York, NY

Sounds like you did not get professional advice before you made the conversion. You should go see an accountant or tax preparer now. You need too clean up this problem before it becomes a audit/penalty issue with the IRS.

You did not mention the amounts involved. One of the option you might want to take is short term borrowing to cover the gap in 2000. The 10% penalty is more harsh then the <10 home equity loan.

Get a tax/accounting professional to advise you.