In general, you may have to pay taxes on the conversion either at the time of conversion or as estimated tax payments during the tax year of the conversion. It is not wise to wait until the tax deadline for the year to pay the taxes because you may incur penalties.
The safest option to avoid an underpayment penalty is to aim for "100 percent of your previous year's taxes." If your previous year's adjusted gross income was more than $150,000 (or $75,000 for those who are married and filing separate returns last year), you will have to pay in 110 percent of your previous year's taxes to satisfy the "safe-harbor" requirement. If you satisfy this test, you won't have to pay an estimated tax penalty, no matter how much tax you owe with your tax return.
If you normally pay estimated taxes (self-employed) or either don’t pay the tax at conversion or through withholdings, you most likely need to pay the tax throughout the year in quarterly estimated tax payments. It’s possible you’ll have to pay a penalty if you don’t make estimated tax payments to cover some or all of the tax you’ll owe on a conversion from a regular IRA to a Roth IRA.
You’ll need to determine the tax payments and pay them by the payment deadline for each quarter. For more information about filing estimated taxes, see Form 1040ES, which also includes an estimated tax worksheet and the forms for filing quarterly estimated taxes.
The estimated tax payment is based on an estimation of your income for the current year. As such, it is possible to underestimate, resulting in an underpayment and penalty. To avoid this penalty, you can use your previous year’s taxes as a guide. In many cases, as long as you pay 100 percent of the previous year's tax, you won’t be subject to the penalty. If you end up overpaying, you can receive a tax refund at the end of the year or carryover the excess amount to help pay the estimated taxes for the next year.
You need to come up with a good estimate of the income and deductions you will report on your federal tax return. You can use TurboTax tax preparation software to do the calculations for you, or get a copy of the worksheet accompanying Form 1040-ES and work your way through it.
Click here for Form 1040-ES.
Click here for Pub 505," Tax Withholding and Estimated Tax"
TurboTax does calculate this and provides you with the printed 1040-ES Forms.
Consider speaking with a Live Agent for additional help. Click here for information on Turbo Tax Support.
Click here for additional information on Form 1040ES for individuals.
Click here for information on "Estimated taxes and how to determine what to pay and when".
Click here for information on why 1040-ES estimated tax vouchers paid out.
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