Using IRA Funds to Pay Conversion Taxes Can Cost Over 30% of Every Dollar

Using funds from a converted IRA to pay the resulting tax bill can cost a person well over 30% of every dollar used to cover that cost. This occurs when assets are moved from a traditional IRA to a Roth IRA, and the conversion amount is added directly to the person's taxable income for the year. The tax bill is generated at the time of the conversion. If the person pulls money out of a tax-advantaged haven to pay those taxes, they incur the cost. The conversion can also push a person into a higher tax bracket, such as moving from the 22% bracket to the 32% bracket. Poorly timed conversions can increase Medicare premiums and trigger higher taxation of Social Security benefits.