@Taxstar58 wrote:
Thanks Champ! 🙂 ...so, if I'm not able to get it in under the gun in April, any tax on my conversion done this year would have to be paid in full? - and then figure out the annualized penalty? Is that done using form 2210 or just when I file next year?
Income reported on a 1099 or W-2 is assumed to be spread out over the year, even if the income is not actually spread out. So the IRS also wants tax payments spread out over the year. So one option is to pay 1/4 of the tax each quarter. The other option is to make a full estimated payment in the quarter where the lump sum income occurred, then use the annualized method to show the IRS that even though the taxes were not evenly spread out, they were appropriate to each quarter's income. This is done on form 2210, which is part of your 2025 tax return (not filed separately).
The advantage to the quarterly method, is that if you do a conversion in the early part of the year, you can spread out the payments over the whole year and still be within the rules. For a $20,000 tax bill, that could be $300 or more of simple interest income, even if the only thing you did was put the money in an insured high yield savings account.
Alternatively, you can have taxes withheld from the conversion. Then you have 60 days to deposit the extra cash into the destination IRA and have it be part of the same rollover. Withheld taxes are also considered to be spread out over the entire year, so this avoids the under-payment penalty. You tell the IRA that you want to convert $88,000 and withhold $20,000 for taxes. They send $66,000 to the Roth IRA. Then separately, you send $20,000 to the Roth IRA and just tell them "this is a rollover within 60 days". They don't need to know (or care) that you are considering it part of the $88,000 conversion, it all works out on your tax return. This, of course, assumes you will have the cash within 60 days. But I think you are already planning that if you can make the estimated payment by June 15 anyway.
Although there is the 110% rule, I am not entirely convinced that it applies to the issue of underpayment of required quarterly estimates. I feel it would be safer to make either the correct quarterly payments or the correct single payment and include form 2210 with your return.
