IRA to Roth

[vettd1]

In late December 2019 I rolled money from my IRA to my Roth IRA and electronically paid estimated tax on the additional income the rollover produced the next day. TurboTax indicated I owed a penalty for failure to pay estimated tax, presumably because it looked at the additional income as earned over the entire year. I overrode the penalty in TurboTax but the IRS assessed the same penalty. I have appealed the penalty and still waiting to hear the results of my appeal. How can I avoid this on my 2020 taxes?

[SteamTrain · Accepted solution]

Yeah...you don't override the penalty, you instead go thru the form 2210AI (Annualized Income) questions on the "Other tax Situations" page to either minimize, or eliminate the penalty on an official IRS form, which is part of the TTX software, but is optional and only used if you decide to do so. 

IF you are lucky and explained the situation sufficiently, the IRS may grant your appeal for your 2019 taxes...without further work on your part, or they may ask you to amend your 2019 taxes to include the form 2210AI before granting you relief.

_______________________

For 2020 taxes, if you plan to do a similar IRA-to-Roth IRA, and single Estimated payment at that time (last month or quarter) ...then you should plan on finding that "Underpayment Penalties" section in the software after you are done preparing your 2020 Federal tax return.  For eliminating the Underpayment Penalties using the form 2210AI, you will be asked to allocate all your income types, withholding and tax payments by "quarter"  (3mo, 2mo, 3mo & 4mo) and by doing so, the extra income and taxes paid will end up in the same final quarter.   (Doing that can be  a pain though, and you need an accurate accounting of all your income types thru the entire year. A spreadsheet helps.  I've done it once....and won't bother again unless the penalty goes over ~$50 to 100...or so ).

___________________

Avoiding it in the future (too late for 2020)...AND avoid the form 2210AI too?

1)  Increase withholding at work (if you are getting a W-2 ) to approximate what taxes would be needed to cover what you plan to convert to the ROTH IRA later in the year.  Then the tax payments are spread evenly thru smaller paycheck amounts, and the default even-income calculations may not show a penalty.

2) Similar to #1, but make 4 exactly equal quarterly estimated tax payments during the year....before  each quarter's deadline, to estimate what extra taxes you expect to owe. When done that way, the default underpayment penalties calcs show taxes paid evenly over the year too.

3)  Convert to Roth in the first quarter of 2021, and make the whole estimated payment at that time.  The large1st quarter estimated payment would show overpayment for the first 3 qtrs in the default underpayment calculations....and maybe the 4th too depending on how accurate you are in guessing what is needed.

[fanfare]

you have until jan15 to make the fourth estimated tax payment.