December IRA to Roth Conversion & 60-Day Rollover

[irunalot]

Looking for some clarification.  My 2025 MAGI will be over $260k once I complete a $40k Roth conversion this month (Dec 2025).  If I withhold 24% of the conversion, only $30,400 rolls into my Roth and the remaining $9600 pays the federal taxes.  Some questions:

  1)  I'm assuming since I do a withholding, there's no underpayment penalty?  Am I correct?

  2)  Can I then use my separate savings account to put $9600 into the Roth (60-day rollover) and not incur any penalty?  This way, I get the full $40k into the Roth.

  3)  Is that $9600 capped because my MAGI is large this year?  In other words, is the $9600 considered a Roth contribution, rollover, or what is it actually?  I think it's a rollover because I'm assuming the 60-day rollover allows this, but this is where I get confused.  

  4)  How will TT treat the $9600 rollover?  There's no document because I'll be using my bank account.  

I do realize this rollover strategy is only allowed once in 12 months.  I didn't do this last year so I think I'm good there. 

Many thanks to all!! 

[Opus 17 · Accepted solution]

1. Yes.

2. Correct. 

3. No, the $9600 is not a contribution, it's a rollover.  Make sure you tell the plan that it is a rollover/conversion and not a contribution.   You have 60 days from rolling over the main portion to send in the extra $9600.  Just tell the Roth trustee that this is a rollover, they don't need to know it is part of the other conversion.  Because this counts as an "indirect rollover", you can only do this once per 365 days.

4. When you enter the 1099-R, Turbotax will ask what did you do with the money.  You answer that it was all converted to a Roth.

If you don;t have withholding, you can probably avoid a penalty by including form 2210 with schedule AI on your tax return.  This form tells the IRS that although your tax payments were uneven, your income was also uneven.

Also note (for future conversions) that the timing rules work in your favor if you do the conversion between January and March.  If you convert between January 1 and March 31, you don't need do withholding, and instead you owe 1/4 the estimated amount on April 15, June 15, Sept 15 and Jan 15.  That allows you to hold some of the money back and invest it elsewhere in the mean time.  

[irunalot]

Awesome!  Thank you so much for the quick response.  Happy holidays!

[Opus 17]

@irunalot 

I should have said that if you choose to not have withholding, you need to make an estimated payment by January 15 (you can do this online at www.irs.gov/payments) and then also include form 2210 with schedule AI with your tax return. 

[dmertz]

Roth conversions such as this are not involved in the once-per-12-months rollover limitation.  Only traditional IRA-to-traditional IRA and Roth IRA-to-Roth IRA rollovers are involved in this limitation.

With regard to making a separate Roth IRA contribution, the amount converted to a Roth IRA ($40,000 if the entire $40,000 ends up in the Roth IRA) is subtracted from AGI when determining your MAGI for this purpose.  In other words, the amount converted to a Roth IRA has no impact on the amount that you are separately eligible to contribute to a Roth IRA.

[irunalot]

@Opus 17

This is a new twist.  I'm really trying to avoid the 2210 but it may be necessary next year when I perform more, higher dollar traditional IRA to Roth conversions.  

I've also thought of performing 4 conversions next year.  That may be my best option going forward.

Many thanks again.  Really appreciate this community.

[irunalot]

@dmertz 

Completely agree with your assessment.  Traditional IRA to Roth conversions are not bound by the once per year limitation.

However, in my case, I am performing the IRA to Roth (not bound by the 12-month rule) and then, I'm performing a cash to Roth 60-day rollover (bound by the 12-month limitation).  

My rationale:

1) I want to perform the IRA to Roth and have withholding to avoid any penalties.

2) The withholding reduces the amount that lands in the Roth so...

3) I'll add cash to the Roth to make up the difference (treated as a 60-day, once in 12-month rollover).

4) I'll avoid the form 2210 AI that many people seem to shy away from.  I may use the 2210 next year but I'll have a whole year to get smarter on that.

Many thanks for your input.  Appreciate the knowledge from all the people in this community.

[dmertz]

"I'm performing a cash to Roth 60-day rollover (bound by the 12-month limitation)."

No, the deposit into the Roth IRA of the $9,600 withheld for taxes from the traditional IRA distribution is still a Roth conversion, no rollover frequency limitation involved.  The fact that cash is distributed from the traditional IRA (effectively to you in the form of tax withholding credited to you) and you subsequently deposit an equal amount of cash into a Roth IRA does not change the nature of the transaction from being a Roth conversion.  It is neither a rollover from a traditional IRA to a traditional IRA nor a rollover from a Roth IRA to a Roth IRA which are the only types of rollovers that involve this limitation.

If you rolled over to a traditional IRA any of the $9,600 withheld for taxes, that would involve the limitation since it would be traditional IRA to traditional IRA.

Section 408A(e) of the tax code includes:

For purposes of section 408(d)(3)(B), there shall be disregarded any qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA.

Section 408(d)(3)(b) is the rollover frequency limitation.  A "qualified rollover contribution from an individual retirement plan (other than a Roth IRA) to a Roth IRA" is the definition of a Roth conversion.

[baldietax]

just to echo the comment in the thread above

"Also note (for future conversions) that the timing rules work in your favor if you do the conversion between January and March.  If you convert between January 1 and March 31, you don't need do withholding, and instead you owe 1/4 the estimated amount on April 15, June 15, Sept 15 and Jan 15.  That allows you to hold some of the money back and invest it elsewhere in the mean time.  "

so if you know next year you will do a Roth conversion, if you work out quarterly estimated tax payments based on the smaller of prior year tax (100% or 110% if AGI > 150k or 75k if filing MFS), or 90% of current year tax; then you won't need to worry about 2210 AI method as long as you've paid quarterly ES evenly and on time.  You can also make the Roth conversion in Q1 rather than Q4 if you know how much you plan to convert, to take advantage of an extra year of tax free earnings.  When you file for 2025 you can work out ES options under Other Tax Situations / Form W4 and Estimated Taxes in time for the Q1 ES due in April.

As for 2210 AI method, the level of pain depends on your situation, you basically need to calculate your AGI for the first 3 quarters (uneven dates - 3/31, 5/31, 8/31 - and 12/31 is your full year return anyway) plus any withholding, qualified dividends and LTCG.  This method is covered when you file under Other Tax Situations / Underpayment Penalties.  And then you may have to deal with equivalent process under state tax also.  I ended up doing this for 2024 due to a December Roth conversion and large Q4 ES payment, and it was a lot of work but did reduce the default penalty; to avoid that mess again in 2025 I just did quarterly ES based on 2024 tax, and did a Roth conversion back in January.

[Opus 17]

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@irunalot wrote:

@Opus 17

This is a new twist.  I'm really trying to avoid the 2210 but it may be necessary next year when I perform more, higher dollar traditional IRA to Roth conversions.  

I've also thought of performing 4 conversions next year.  That may be my best option going forward.

Many thanks again.  Really appreciate this community.

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If you want to avoid any possibility of needed to file 2210, then you need to do your withholding, and make it up (if you want) from other funds.

For 2026, you certainly could break up your conversion into 4 chunks, one per quarter, and make the appropriate estimated payment by the due date for that quarter.  To avoid the need for a 2210, the 4 conversions should be about the same amount of money and the 4 estimated payments also about the same.  If one of the conversions is much larger than the others, you will run into the same potential issue. 

[irunalot]

Thanks to all who've responded.  For 2025, I'll do the Roth conversion without withholding and make up the taxes from another account.  This way I maximize my Roth balance.  I'll then deal with the 2210.  For future years, I'll be making more frequent conversions and paying some as I go.  Sincerely appreciate everyone's thoughts.