Paying Income Tax on a Roth Conversion

[user17609754020]

We converted a $50,000 traditional IRA to a Roth in September. It will not put us in the next tax bracket. We are both 65 or over, receiving a pension and social security. We opted not to have taxes taken out of the conversion. Can we wait to pay the income tax at the time we file our tax return?

[AmitaR]

Our tax system is "Pay As You Go" and not wait until the tax time.  If you have a balance due more than $1,000 you may be assessed an Estimate Tax Penalty.

If you owe  more than $1,000, there is a Safe harbor exception.

The "safe harbor" exception protects you from estimated tax penalty if you meet one of the following two conditions:

• 90% of current year's tax: If you have paid at least 90% of the total tax you will owe for the current tax year.
• 100% of the previous year's tax: If you have paid 100% of the tax shown on your previous year's return (110% if your Adjusted Gross Income was more than $150,000 ($75,000 if married and filing separately))

Waiver due to unusual circumstances

• Casualty, disaster, or unusual event
• Retirement on disability

[Opus 17]

NO.

First, an estimated payment will be due by January 15.  You can only delay to the filing date if you file and pay in full by January 31, and most people don't have all their paperwork at that point.

Second, the IRS is going to see that income as if it was spread out over the whole year, and they are going to want to see estimated payments (about $2500 each) having been paid in April 2025, June 2025, Sept 2025 and January 2026.  Since you did not make those payments, you need to make the full estimated payment by January 15, 2026, and also fill out the penalty form 2210 with your tax return and use the Annualized Method (schedule AI).  This shows the IRS that your income was not evenly spread out but that your payments matched your income in each quarter. 

[user17609754020]

"The "safe harbor" exception protects you from estimated tax penalty if you meet one of the following two conditions:

• 90% of current year's tax: If you have paid at least 90% of the total tax you will owe for the current tax year.
• 100% of the previous year's tax: If you have paid 100% of the tax shown on your previous year's return (110% if your Adjusted Gross Income was more than $150,000 ($75,000 if married and filing separately))"

To make sure I'm understanding this.  If our 2024 taxes show a refund due to us, that qualifies as a "safe harbor" exception for 2025 tax filing?  We haven't had taxes due on our return in over 10 years.

[Opus 17 · Accepted solution]

@user17609754020 

The safe harbor means that, you must pay into the system in 2025 (by withholding or payments) 100% of the tax you owed in 2024.

For example, if in 2024, you paid $12,000 in withholding and got a $2000 refund, the tax you owed to the IRS was $10,000.  You must pay at least $10,000 to the IRS in 2025 to qualify for the safe harbor.   Your actual tax for 2024 is shown on form 1040 line 22 and does not include self-employment tax or penalties.  

However, I am not convinced this will protect you.  It is a safe harbor for the general underpayment penalty that is assessed if you are short when you file your return, but I don't think it protects you from the under-payment penalty that you will owe back-dated to April 15, June 15 and Sept 15 for the estimated payments due from the lump sum of income.  I still recommend you make an estimated payment by January 15 and include form 2210 and Schedule AI with your return.