2025 Roth Conversion All in January - Pay Taxes Quarterly?

[memorris7]

May want to do a large Roth conversion (>$250,000) in January. Only other taxable income for the rest of 2025 will be <$3,000 of qualified dividends. Can I pay the Federal taxes - ~$45,000 over the 4 quarters (~$11,250/Qtr) without penalty? Not asking about the amount, only if I can divide the total, estimated tax of $45,000/4 and pay 1/4 - $11,250, on the quarterly dues dates of 4/15, 6/17, 9/16 & 1/15/26, rather than paying the entire $45,000 on 4/15?

Thanks!

[fanfare]

What is your 2024 tax ? do you have withholding taken in 2025?
If your total 2025 withholding alone is 100 % of that amount ( 110% if your 2024 AGI is over $150,000),

You don't need to make estimated tax payments. This is the prior year's tax rule.

If you got a 2024 refund this year and 2025 earnings are comparable then your 2025 withholding may already meet the prior year's tax rule

Unfortunately, this won't work for you since you say you will have no earnings in 2025 and therefore no withholding in 2025.

See Form 2210 Schedule AI for how much you will need to pay quarterly to avoid penalty.

@memorris7 

[memorris7]

Should have added that we are retired (on purpose to have no income so we can fill up the tax brackets with Roth Conversions). So no withholdings and we are paying the taxes from a taxable, non-retirement account and don't have taxes withheld from the conversions. Have always done the conversions at year-end (so entire tax bill paid 1/15 each year) but in 2025, it may make sense to do the entire conversion in January.

[VolvoGirl]

Also have you considered the affect on your Social Security if you are over 65?  If  your income is high you may have to pay extra IRMAA for the Medicare deduction.  

On my letter from Social Security for IRMAA it uses your AGI plus tax exempt interest on 1040 line 2a. See this,
https://secure.ssa.gov/poms.nsf/lnx/0601101010

The MAGI thresholds used for IRMAA calculations are:
Married, filing jointly
2024 $206,000
2025 $212,000

See The Finance Buff article on IRMAA brackets
https://thefinancebuff.com/medicare-irmaa-income-brackets.html#htoc-2026-irmaa-brackets

[memorris7]

Yes, took those into consideration many years ago when I came up with the plan to do this. We are paying some IRMAA now, but the NPV of that and paying taxes today at very low rates more than makes up for the incredibly high RMD taxes if we had not started Roth Conversions a number of years ago. Thank you, not everyone understands the IRMAA tax penalties! They can be rough, especially since they are a "cliff".

[fanfare]

IRMAA  stops when you stop converting Traditional to Roth.

It also stops when your entire retirement is funded by a Roth IRA, not a Traditional IRA

Tax on Social Security benefits also stops.

[fanfare]

"paying taxes today at very low rates more than makes up for ... "

You won't be paying a very low rate when converting $250,000.

@memorris7 

[memorris7]

Total Fed/State 22%, w/o Roth conversions 32-34% bracket

[Opus 17 · Accepted solution]

Answering your actual question, yes, you can spread out the estimated payments.

The IRS assumes that 1099-R income is earned spread out over the year, so they will want to see the payments spread out over the year.   When you make a conversion at the end of the year, this assumption hurts you because the IRS wants to see the taxes paid in all 4 quarters, not just at the end of the year.  But if you make the conversion in the beginning of the year, this assumption works in your favor. You can spread out the tax payments over all 4 quarters (and possibly invest the rest in the mean time) and not incur a penalty.

Of course, you may need to include estimated taxes for any other income, and I have not talked about tax brackets or IRMAA.   If you are married filing jointly, and you have no other income, you can convert about $100,000 and stay in the 12% bracket.  Converting more will push you into the 22% bracket.  You might want to spread the conversion out a bit.  

[memorris7]

Thanks to everyone for the great answers. We are converting at the $250k+ level to reduce the balance in our IRA's (for at least 10 yrs), the combined effective Fed/State tax rate is ~21% (yes some income is in the 24% bracket) and have factored in the IRMAA penalties . This is needed to reduce the RMD's, which when combined with SS (not taking until 70) would have put us at least in the 32-35% Fed with (with annual growth of 6-7%, but invested very aggressively so likely a higher growth rate) and if the TCJA expires at the end of 2025,  33-35%, plus ~6% state. So will keep my eye out in Q1 for a sharp market downturn for a large conversion, then pay the estimated taxes quarterly. This was very helpful and am sure it will be for others who are contemplating Roth conversions. 

[royper]

I have found a way to use 2024 (previous year as we are in 2025) Turbotax to get a rough idea of the estimated tax payments I need to make in 2025 (current year) to minimize my tax penalty when my 2025 income is expected to be UNEVEN.  I’m not sure, but I think that the 2025 estimated tax payments generated by ttax 2024 is based on the assumption that your total expected income in evenly distributed throughout the year, as does the IRA. This can lead to a large penalties if your income is significantly larger in certain quarters.  You can use also this when you expect to get 2025 W2 income together with uneven 1099 or other income.  This method presumes that tax rates will not drastically change from 2024 to 2025.  You are only looking for an estimate of possible penalties of +/- ~$100 in penalty.

If there is a simpler way, let me know and I’ll kick myself 😊.  If there is an issue with this method let me and others know.  As I finished this, I realize it’s too long and no one will likely read it!  I wanted to explain this to myself.

I do this because my projected (current year) 2025 income is a result of quarterly ROTH conversions that change depending on how my investments and market is doing.  I’m retired and need to convert as much of my IRA to ROTHs before 73 to minimize taxes from RMDs. 

There are three key steps:

1.  Using the step-by-step mode REPLACE ALL 2024 income in 2024 turbotax (previous year) with your EXPRECTED income for 2025 (current year).  I start with this as it has all my info but you can start a new 2024 return if you prefer. You can do this in the step-by-step mode by just replacing the 2024 income in the “wages and income section”.  You can use this method if you have W2, 1099 or interest and div income.  You are basically creating a MOCK 2025 tax return using the 2024 ttax program.
   
   
2. Add any 2025 data to the “Deductions and Credits”
   
   
3. After you do this the next key step is to use the step by step mode and go to the “other Tax situations”  -> “Additional Tax Payments” -> Underpayment penalties and hit update. At some point it will ask “Do you want to annualize your income?”
   
   
4. Answer yes.   When you go through this you MUST enter your total previous year 2024 tax, in the “2023 (previous year) Tax Liability” box. The 2023 year was entered automatically imported by TTax because you are using the 2024 ttax you filled out in 2025.   You want to use PREVIOUS year (2024) because you are faking the 2024 ttax program to estimate the penalties for the current year (2025) based on projected income.
5. I know, this can be confusing!   At least it was to me.
   
   
6. Next add your (previous year) 2024 adjusted year gross income in the “2023 AGI” box.  These two, total tax and AGI of from previous year (2024) is needed for the annualization calculations to determine the (current year) 2025 estimated tax payments to avoid penalties.
   
   
7. Answer yes to “do you want to annualize your income”
   
   
8. Next add your CUMULATIVE 2025 (not 2024) income for Q1, Q1+Q2, Q1+Q2+Q3 in the three input boxes under “Annualized AGI”.  The fourth box will already be filled in from the total 2025 PROJECTED income you added earlier.  The last box will automatically be Q1+Q2+Q3+Q4 income if you had added ALL PROJECTED 2025 income in the income section.  Note that IF you have steady w2, and interest income, etc., these also need to be cumulatively added in these boxes as they are generated PER QUARTER along with any 1099-misc income in each quarter.  THIS IS KEY. 
   
   
9. IMPORTANTLY, before you start determining your estimated taxes needed to avoid penalties in 2025, IF you have significant tax that you expect to be WITHHELD in the current (2025) year (e.g. from a W2) (BUT NOT PAID AS ESTIMATED PAYMENTS) then you will need to go directly to Form 2210 to add that. This HAS to be done in the form 2210 itself, using “view Forms” as I could not find a way to do this in step-by-step.
   
   
10. You may see forms 2210, 2210 Penalty and 2210AI forms listed under “forms in my return” in view form.  Form 2210AI will have the cumaltive income you added in the step-by-step and form “2210 penalty” will show any expected penalty.
    
    
11. Determine the projected CUMULATIVE quarterly tax you expect to be WITHHELD from any W2 income (you need to estimate these) AND check box D in Part II of the form 2210 in view forms.  You add this cumulative (WITHHELD only) tax to the boxes under “Part II, Line D - “Tax withheld Smart Worksheet”.  Any significant interest income from savings accounts and div, I typically estimate by dividing the expected totals by 4 (for 4 quarters) and add that those cumulatively to the boxes in this section.  This not 100% accurate but you are trying the get estimates for 2025 so it is OK.  I actually used this w2 and interest income estimation method in my actual 2024 ttax to determine my tax penalty using the  “annualization of income” method as I didn’t want to go through each quarter reports for the int and div.  Those were small anyway but we will see what the IRS thinks.
    
    
12. Continue and at “Conclusions” UNCHECK that box that says “Do not use the Annualize your income”  Not sure why this box is checked by default.
    
    
13. Add the date you expect to pay the your balance of taxes due (.e.g, 4/14/2025)
    
    
14. NOW FINALLY you are ready to determine your 2025 estimated taxes to pay in order to avoid or minimize penalties.  Note that your PROJECTED ESTIMATED (NOT withheld from e.g, W2) tax payments for 2025 that you guess need to be made are added in the “Tax Payments Worksheet” that you access via “View Forms” => “Tax Payments.”
    
    
15.   At this point, you will go through an iterative process whereby you enter various 2025 estimated tax payments AMOUNTS as well as WHEN you pay these with the objective of minimizing any penalty for late tax payments in 2025. Note that when you add your estimated tax payments, you will use dates using the dates 4/14/2024, 6/15,24,  9/14,2024 and 1/15/2025, even though you will actually be making these payments in 2025 and 2026.  I know it can be confusing!.   Note that I pay as late as possible but you can any dates before the quarterly deadlines.  The reason for these 2024 and 2025 dates are that s you using the 2024 program.  If you use the actual 2025 and 2026 payments you will be making the program will not know what to do.  Remember you are using the 2024 program!
    
    
16. Under “view forms” =>  “tax payments” enter any test estimated payments for 4/14/2024,  /14/2024, 6/15,24,  9/14,2024 and 1/15/2025 and look at the penalty in Form 2210, line 19 as you change the amounts and when you pay.  If the program is propagating properly, then as you play around with the possible projected payments on the various dates, the 2210 penalty Form will appear in the “Forms in My Return” column if there is a penalty and disappear when there is none.  If this is not happening, then you can look at line 19 in Form 2210.
    
    
17. That’s it!!!!   You will see that both the amounts AND when you make them matters in whether you will be assessed a penalty.  I look to minimize AND delay payments while keep the penalty below $100.  I’m expecting to make large estimated tax payments.  I figure delaying and getting a small penalty is better than paying upfront.  Remember, none of this illegal, you are just trying avoid a penalty and minimizing and delaying payments as much as possible.
    
    
18. You can also shoot for zero penalty.  Remember, these are estimates with an accuracy of +/- ~$100 as you are using 2024 Ttax to guess at 2025 penalties.  I found that if you are making large uneven quarterly ROTH conversions that this annualized method can save you hundreds or thousands of $ relative to using the default, non-annualized method the IRA uses. 
    
    
19. Good hunting!