@cdenorch wrote:
I'd like a little more clarification, because I'm in the same boat. Also, for the record, I usually receive a federal tax refund from the IRS each tax year of $2,000. In this scenario, are you saying that for the Roth conversion of $20,000, s/he should take $5,000 out of the Roth conversion amount of $20k, thereby depositing $15k into the Roth, and then taking the $5,000 and writing a check to the IRS? What if s/he is in the 22% tax bracket? Thanks in advance.
There is a difference between writing a check and having withholding.
In the previous example, a $20,000 Roth conversion in the 22% bracket will require paying the IRS (at some point) $4,400.
- If no money is withheld and no extra payment is made, the $4,400 will be due when the tax return is filed. Because you are supposed to pay your taxes evenly over the year, you can be assessed an under-payment penalty even if you pay in full when you file the return.
- If you normally expect a $2000 refund, then you will owe $2400. This will still trigger an under-payment penalty, but it will be less, since it is based on the amount owed.
- If you convert $20,000, and you have an extra $4,400 in a bank account somewhere, you make an estimated payment to the IRS in the same tax quarter as the conversion. However, you still can be assessed an under-payment penalty. This is because, for $4,400 of taxes, the IRS wants to see it broken over 4 equal installments of $1100 each that were paid in April, June, Sept and January. Even if the conversion (which is a lump sum income) occurred in let's say October 2025, the IRS wants to see payments of $1100 in April, June and September, and by not making those payments, you can still be assessed an under-payment penalty. This penalty can be avoided (usually) by including form 2210AI with your tax return, but you have to manually select to include this form if Turbotax doesn't trigger it for you.
- If you normally expect a $2000 refund, then you would need to make an estimated payment of $2400, but you still need to include form 2210AI with your return to reduce the calculated penalty.
- If you convert $20,000 and you don't have $4400 to pay the taxes, then you can't afford the conversion. You could have $4000 withheld, this means you are withdrawing $20,000 but converting $16,000. The $4000 is a taxable withdrawal (regular tax plus a 10% penalty if you are under age 59-1/2) and the $16,000 is a taxable conversion. The $4000 withholding goes to your account with the IRS to offset the taxes on the $20,000. You are $400 short on taxes, but that is a small enough amount to not trigger a penalty.
- If you normally expect a $2000 refund, you could convert $20,000 with $2000 of withholding. This will be entered as a $20,000 withdrawal with a $18,000 conversion and $2000 taxable withdrawal. The $2000 withholding plus the $2000 usual refund will mostly offset the taxes, leaving you with a bill for $400 (which is too small to trigger a penalty.)
Anything else?
