Help! Recharacterizing an IRA as a Roth IRA

[Jennif102]

Hi,
I just rolled over an old 401K to a IRA and now I am recharacterizing that IRA as a Roth IRA (have very little income this year, IRA value has fallen a lot so now is the time to do it).
Anyway, I'm about to hit the button to do the recharacterization online and I get this warning:

Federal Tax Withholding:
IRS regulations require the custodian of the IRA from which you are converting to withhold income taxes at the rate of 10% from the converted amount unless you elect not to have withholding apply.

Withholding will apply to the entire cash amount of the conversion, even if non deductible contributions to the IRA have been made. You may still reinvest the entire conversion amount by replacing the amount withheld with other assets. Any amounts withheld and not replaced into the new Roth IRA within 60 days may be subject to a 10% early-withdrawal penalty if you are under 591/2 years old.

Indicate your withholding election below:

Do not withhold Federal Income Tax - I understand it's my responsibility to pay Federal Tax.*

This scares me! Why do I have to have 10% taken out now? Why can't I just roll over 100% of the IRA now and pay taxes on the pre-tax money when my taxes are due next year? Am I missing something here? Do I have to pay "estimated" taxes now and that's why this warning comes up? Or is it just a safeguard for people that won't be able to come up with the tax money next April?

Thanks for the help!

[MonkeyMama]

If you pay when your tax return is due, it could be late and you could pay a penalty.

Yeah, pretty much you need to pay in Estimated taxes. (For many people, 10% is not enough withholding; there are also state taxes to consider).

I would pay in estimates, and skip the withholding. They would be due January 15th.

I would not wait until April 15th unless you wanted to pay some penalties, or you knew for some reason you would be exempt from penalty. Like if it's a small amount, it could be moot.

[jIM_Ohio]

technically you are doing a Roth conversion.

who holds the rollover IRA?
I did a conversion (from rollover to Roth) in 2007 and did not have this issue?

How much are you converting?

[Jennif102]

I would pay in estimates, and skip the withholding. They would be due January 15th.

I would not wait until April 15th unless you wanted to pay some penalties, or you knew for some reason you would be exempt from penalty. Like if it's a small amount, it could be moot.

So how do you pay in estimates? I feel like there's so little information out there on this. I def. will owe more than 10%. Is there a link on the IRS website that explains this all better?

I did the same thing last year and never paid estimates. Just counted it when I did my income taxes (I had nothing to pay because I was in school full time all last year and had no income other than the conversion).

thanks!

[MonkeyMama]

So how do you pay in estimates? I feel like there's so little information out there on this. I def. will owe more than 10%. Is there a link on the IRS website that explains this all better?

I did the same thing last year and never paid estimates. Just counted it when I did my income taxes (I had nothing to pay because I was in school full time all last year and had no income other than the conversion).

thanks!

I don't think there is a simple answer. The estimate form is 1040-ES.

BUT, if you had no income or income tax last year, then it's all moot. You won't get penalized and you will not owe the taxes until April 15th. (Safe Harbor rules).

So basically, don't worry about it. But if you have an idea of your tax rate, you can calculate how much you need to set aside for April 15th.