Estimated taxes on roth conversion?

[trailflier]

Back in January I rolled my previous employers traditional 401k into my Roth IRA. I'm not going to make either of the safe harbor requirements this year with my payroll withholding since my income is way down from last year. Is it too late to make an estimated tax payment on my roth conversion? Was I supposed to make a payment in January? Will I get a penalty if I make the payment now? Can I fulfill the safe harbor by making estimated payments, or do those have to come from payroll withholding?

[SteamTrain · Accepted solution]

A whole lot really depends on the $$ amount you converted, and the added taxes it eventually will cause.

Best option if possible:

1)  IF the extra tax amount is small enough, at this point in time, the best route (opinion) would be to increase your tax withholding at work by submitting a new W-4 with lower allowances...or a specified extra withholding amount with each paycheck, such that you get well-over the safe harbor level by the end of the year.  If done that way, there's no extra paperwork at tax time.  But like I say, it depends on the extra taxes you expect from the conversion.  And a new W-4 this submitted week, might not get started by your employer until the end of Sept paycheck.    But if enough can be withheld, this could satisfy the safe harbor requirements for you.

Less Easy Option

2)  Since the conversion was last January, the safe harbor level using estimated tax payments could have been accomplished, but that would have required either a large payment in the first quarter, or exactly equal estimated payments for every quarter to cover what extra is needed.   IF you have a large amount to pay that cannot be done with withholding...then you have done nether of these......but, starting your estimated payments now (one before Sept 15th and another before Jan 15, 2020) will potentially limit any penalties and interest for underpayment at tax time.  Even with these final 2 quarterly payments, you would likely have to prepare the Annualized Income forms  (2210/2201AI) at tax time to get the minimized penalty....those forms require that you enter  your total income from all sources based on which quarter they occurred, and all tax payments by quarter, and all deductions by quarter....etc...I find that to be a real mess to do as you need all your monthly statements from your bank/broker/employer...and detailed dates of all your charity contributions and state refund (if any) from last year.  I've done it just once...hope to never have to again. 

Either that you you just eat the penalty.

So option #1 would be better...if possible.

____________________________________

Others here may have some other opinions, and I may have missed some detail that needs to be commented on.     If you decide to use estimated payments, try the make the first one larger before 15 Sept.  You can arrange an IRS Direct Debit a their website ( if you need to do state too...you'll have to check your state's tax website to see what they offer).  For estimated payments online, Don't wait until the last day...get it set to be debited by the 10-12th of Sept.

https://www.irs.gov/payments/direct-pay

[trailflier]

Thanks, @SteamTrain!

I just filled out a new W4, with an additional amount on each check being withheld to satisfy the safe harbor/probably get a refund... better safe than sorry!

Follow up, somewhat related question... If I' meeting safe harbor from my withholding, is it an issue to make a 2k-3k estimated tax payment in Q4 to meet the minimum spend requirement for a credit card? Obviously there's a fee involved with paying taxes on a CC, but in this case, meeting the minimum spend far outweighs the fee. But I don't wan't a paperwork nightmare come tax time... since I didn't make any estimated tax payments in Q1-Q3. That annualized income form sounds like a major pain! 

Thank you so much!

[SteamTrain]

As long as the safe harbor minimum is satisfied by tax withholding alone, then extra Quarterly estimated payments aren't considered as to when they were made....they just go in as an additional credit against taxes owed.

Depending on which of the safe harbors you are referring to, make sure you re-read them.  Current year safe harbor of 90% of the final 2019 tax assessed is pretty straightforward.  For this one you really need to have an accurate idea/guess or overestimate of what that tax will be...and if you hold significant Mutual Fund investments...that can be all over the place since you won't know what they are spitting out as year-end cap gains, or interest and dividends until December (usually).

....but the prior-year safe harbor has a subtilty... either, that you paid in more than 100% of last year's total tax assessed as long as your AGI for 2018 was less than $150,000 ($75,000 if MFS ). But if the 2018 AGI was higher than those amounts, then the 2019 tax pre-payment must be at least 110% of the 2018 assessed tax.

And, of course, the IRS can change them, usually to be more lenient....like they did so at the last minute for 2018 tax returns.  ( I find that somewhat unlikely for 2019, but then politics/congress might intervene )

_______________________

(Not sure exactly what CCD minimums you are referring to...but I'm guessing you have a type of credit card that needs some minimum use to avoid other fees...or something of that sort)

[dmertz]

Since the taxable rollover to the Roth IRA was in January, it's likely that it would be impossible to avoid an underpayment penalties for Q1 and Q2  just using estimated tax payments.  Increasing tax withholding is the only way to do so.

Don't forget about state income taxes.  Unlike federal treatment of withholding, some states treat tax withholding the same as estimated tax payments and it might not be possible to avoid a state underpayment penalty for Q1 and Q3.  You might need to make a Q3 state estimated tax payment to make up the entire underpayment shortfall to date to avoid state underpayment penalties for Q3 and Q4.