When you do the rollover, try to have the taxes withheld by the broker instead of making a separate payment.
Here's the problem, as simple as I can make it.
The IRS considered income to be spread out over the entire year. They don't if you rolled over $10,000 all at once or $200 per week. So they assume the income was spread out over the year, and they want taxes to also be spread out over the whole year.
Now, any withholding is also considered to be spread out over the whole year. Just like they don't know if you rolled over $10,000 all at once or $200 per week, they don't know if you had $2000 withheld all at once or withheld $40 per week. So they assume withholding is spread out over the year. Spread out income, spread out withholding, no penalty.
But an estimated payment is made on one specific day and they know it. So if your $10,000 income is considered to be spread out over the whole year, they want to see either withholding (also considered to be spread out over the whole year) or they want to see estimated payments in every quarter, spring through winter, even though you only made the withdrawal in winter. That's why the penalty. You were under-withheld or under-paid over the year.
One answer is to use the annualized method on form 2201 to show your income was uneven and your tax payments matched your income in each quarter. The simpler method is to have the taxes withheld by the broker instead of making an estimated payment.
