Avoiding Penalty After A Roth Conversion Late In 2019

[Faustind]

My wife has a Traditional IRA that we want to convert to a Roth IRA before the end of calendar year 2019. Obviously, we will not be able to submit quarterly income tax payments to the IRS for calendar year 2019 because there are only 2 quarterly payment dates remaining. Is there a way that we can avoid an Income Tax Penalty for our income tax for 2019 due to this Roth IRA Conversion? If we have 10% withheld for the conversion (like we do for our annual RMD), that will be an amount a little over our Total Tax Owed for 2018 (Safe Harbor Rule). Any suggestions on how to avoid a penalty for this Roth Conversion? Thank you.

[VolvoGirl]

Why can't you send in an extra payment?  You can pay anytime directly at https://www.irs.gov/payments 

But anyway if Turbo Tax calculates an underpayment penalty next year you can probably eliminate it (or reduce it) by filling out form 2210 and putting down when you received your income.

Here, look at 2210 https://www.irs.gov/pub/irs-pdf/f2210.pdf

and instructions  https://www.irs.gov/pub/irs-pdf/i2210.pdf 

[VolvoGirl]

If you want to use your current 2018 return to estimate the quarterly payments you can put down $1 for the 1st & 2nd quarters so it will only calculate the 3rd and 4th quarter.

Go to
Federal Taxes or Personal (Self Employed or H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

Say No to W4. When you get to the W4 and Estimated Taxes section, say you want to adjust your income to go though all the screens.

[bainnoah]

I had a traditional IRA that I converted to a Roth IRA in 2019 Obviously I will not be able to submit a quarterly income tax payment. I owe a $550 penalty.  Is there anyway to avoid this penalty

[VolvoGirl]

There should not be a penalty on a conversion.  You might have some extra tax due on it.  What code is in box 7?  Did you select you moved it to a ROTH?  @dmertz 

[dmertz]

The penalty is apparently a tax underpayment penalty.  The only way to potentially reduce the penalty is to annualize income on TurboTax's 2210AI form.  This would probably only help if the conversion occurred later in the year.

[bainnoah]

the code on my 1099-R is (7) normal distribution.  I don't see conversion to Roth

[bainnoah]

on my 1099=R box 7 has code (7) normal distribution .  I don't see conversion to roth

[macuser_22]

The 1099-R does only reports a distribution.  What you did with the money is something that you must report yourself.  If you converted that money to a Roth then when entering the 1099-R, you answer the interview question that you moved it to another retirement account and converted it to a Roth,

[hkluis]

The original question was about how to avoid the underpayment penalty due to not paying the estimated tax throughout the year.  I'm in the same boat.  I tried the suggestion to adjust W-4 but that doesn't eliminate the penalty. This is a common scenario.  I would expect TurboTax to ask about the date of the IRA withdrawal and fill out form 2210 automatically.

Does anyone have a suggestion on how to avoid this penalty?

[dmertz]

The way to eliminate the penalty for income received late in the year, if you do meet one of safe harbors to avoid an underpayment penalty you must annualize income on Schedule AI of Form 2210.  When TurboTax determines that you would otherwise be subject to an underpayment penalty, TurboTax does ask if you want to annualize income and guides you through the process.

When annualizing income on Schedule AI you must annualize all income, so there is no point in TurboTax asking about the timing of only your retirement income.  Also, it would be extremely disruptive to most other users if TurboTax was to ask all users about the timing of each item of income, so it is impractical for TurboTax to ask about the timing of any item of income during the income-entry process.

Annualizing income won't always eliminate the penalty if you underpaid for any particular quarter.  Only tax withholding applies to all quarters evenly by default.  Estimated tax payments apply when paid.  This means that tax withholding later in the year can make up for underpayment earlier in the year while estimated tax payments cannot.  If you can't generate enough tax withholding from existing sources late in the year to make up for the amount of underpayment earlier in the year, you can sometimes manufacture tax withholding by taking a rollover-eligible retirement distribution, have a majority of that distribution withheld for taxes, then roll over the entire gross amount of the distribution by substituting other, nonqualified funds.

@hkluis , if you can afford to do so you can further increase tax withholding by submitting another W-4 specifying a greater amount on line 4(c).  However, if the underpayment for, say, Q1 is large, you might have to increase tax withholding well beyond the total amount needed for the year just so that 1/4 of that additional withholding will be applied to Q1.

[VolvoGirl]

Didn't see anyone post the steps to get to the 2210.

You might be able to eliminate it or at least reduce the penalty. You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you. It's form 2210.  And it is just an ESTIMATED penalty.   It's  common and normal and expected for the IRS or state to bill you for more or send you a refund.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button