Could Cause 10% IRS Penalty
For example, you convert a $100,000 IRA to the Roth, causing you to owe $35,000 in federal income taxes. Are you able to pay the tax from earned income or money held in other accounts? If you use money held in the IRA, and if you're under age 59½, you'll owe a 10% IRS penalty in addition to the tax itself. That's an additional $3,500. (And we haven't mentioned state taxes — paying those from the IRA could further increase your taxes and IRS penalties.)
In our next blog post, we will discuss Roth IRA conversion complication #5.