Hello Kris A, and thank you for your questions!
You asked,"How do I calculate and pay taxes for a Roth IRA conversion in advance?"
To calculate and pay advanced taxes on a Roth IRA conversion, follow these steps:
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Determine the amount of the conversion: The amount you converted is the starting point for calculating your estimated taxes. This amount will be included in your taxable income for the year.
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Project your income for the year: Estimate your total taxable income for the year, including the conversion. This will help you determine the correct tax bracket and tax rates that apply to your total income.
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Calculate your estimated tax liability: Use the tax rates, tax brackets, and deductions to estimate your tax liability for the year, including the tax due on the conversion.
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Calculate your required estimated tax payments: To avoid underpayment penalties, you may need to make quarterly estimated tax payments to the IRS. The required amount is usually 90% of the current year's tax liability or 100% of the prior year's tax liability (110% for high-income earners). You can use Form 1040-ES to calculate your required estimated tax payments.
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Make your estimated tax payments: You can make estimated tax payments online, by mail, or by phone using the IRS Electronic Federal Tax Payment System (EFTPS).IRS Payments
Keep in mind that converting from a traditional IRA to a Roth IRA can add the conversion amount to your taxable income for the year, potentially pushing you into a higher tax bracket. The conversion is then taxed at your ordinary tax rate, which may be adjusted depending on your new tax bracket.
For instance, if you're in the 22% tax bracket and convert $20,000, your taxable income for the year increases by $20,000. If this does not push you into a higher tax bracket, you will owe $4,400 in taxes on the conversion.
However, if your taxable income now exceeds the threshold for the 22% tax bracket, the conversion amount exceeding that threshold will be taxed at a higher rate, which is 24% in 2024.
Also keep in mind that this increase to your overall income, could impact your state tax return, as well, so you may want to consider making a state estimated payment based on your individual state income tax rates, as well.
For additional information on this topic, please see:
Roth Conversions
What are Traditional and Roth IRA Cnversions?
IRA Conversions
Please feel free to reach backout with any additional questions or concerns you might have!
Have an amazing rest of your day!
Terri Lynn, EA
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