What Are Creative Ways to Pay Taxes on a Roth IRA Conversion?

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Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

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So first question is when you do a Roth conversion, should you pay the taxes from another source? Why can't you use some of the funds that is being converted to be used for taxes?

For example, if I convert a hundred thousand dollars from a traditional IRA to a Roth IRA, why can't I use 20,000 of that money to pay taxes?

I want to convert a hundred thousand dollars from IRA to Roth. And so let's say I'm at 20% tax. I've got to pay $20,000 in tax. Why can't I just take it out of that put 80,000 in the Roth and send 20,000 to taxes?

If I let that a hundred thousand grow in the IRA, versus the $80,000 grow, tax-free say 10 years down the road, I cash out the a hundred thousand whatever it's worth. And let's say I'm still in the same tax bracket, by some chance, actually end up in the same place.

They're identical.

There are some advantages still to the Roth, even in that situation. Right now in 2025, the tax rates are going back up. So if I was able to cash some money out now, I could pay a lower tax if they don't keep the same tax rates. Congress actually has to approve that as a whole, they're scheduled to sunset and go back up to where they were before 2017.

So it the 24% bracket is going to go to 28%. I'd have been better off right over the long-term paying the tax now, than paying it later. That's one advantage if I do this, if I'm at the same spot, but now I have more control over my finances going forward because now I don't have to take a requirement of distribution out of the Roth.

So it can work.

But, paying the money for taxes with outside assets allows me to move the entire $100,000 into that Roth.

So if you think about this. One thing that happens with an IRA is that you can look at it and let's say it's worth a hundred thousand but not all to you. The government owns part of that. And so let's just say in this case, it's 20%.

So really what it's worth to use $80,000, there's no way around the taxes on those. So if you roll that over & you pull $20,000 out of your assets, outside of retirement plans & put the full hundred thousand, you now have a hundred thousand to you. That's what it's worth because it's tax-free,

It was worth $80 now its worth a hundred. What you just did was added $20K to your Roth, to your overall retirement plan. And now it's growing tax-free & when you do those numbers, it's unbelievable. Doing so, it might override any potential future tax changes & different things that might happen that could affect a Roth, if you're paying with outside assets.

So I would go out of my way to try to pay those, you know, taxes with outside assets, if I could, just because it's so much better, I now have that 20,000 growing tax-free, you know, really for the rest of my life, of course, that whole extra $20,000 then could be passed on to my kids.

They can leave it in for 10 years growing tax-free if you do the big numbers on that, it's a huge differential. And so we really try to encourage people to pay the taxes with assets outside, because it's just so much more advantageous.

But it could work. There are some caveats to that, but it could work, to pay the taxes with the distribution. So with the conversion, just convert $80,000 and pay the 20% to the IRS and your state taxes. But, it's still, the whole conversation really revolves around the Roth, which is fantastic vehicle.

0:00 Intro
1:15 Advantages to Roth
2:00 Control over Finances
2:15 Using Outside Funds for Tax-free Growth
4:10 You Can Pay with the Distribution