How to pay tax on Roth conversion-need clarification.

[DigitalWinePress]

I am considering a Roth conversion. For sake of conversation make it for 2022 tax year. I've determined approximately how much I can safely convert (dividends late in year will help finalize amount) . I want to avoid any penalty for 'under withholding'. So the clarification I need is on just exactly how I can time the conversion and time the tax payment to achieve both ease of doing so (process) and avoiding the penalty. (I also want to avoid having to fill out pages of additional tax documentation. That goes against ease of process)

I have three methods I've been exploring:

1) Make conversion in Dec of 2021 and pay all the tax due online with IRS and State. That is the seemingly easiest way to do it once and be done for the year. However I wonder if the IRS and State taxing agency will apply a penalty even though in effect I have paid the taxes as the taxing event occurred. In my mind that is timely.

2) Make quarterly conversions and make the online tax payments those conversions necessitate at the same time. I've never done quarterly estimates or payed online in a systematic way like this before but it seems several people I have spoken to begrudgingly do so.

3) This one seems the most difficult to be precise. Increase tax withholding on my pension so as to pay every month an additional amount to state and fed representing the anticipated amount I will only know precisely at the end of the year (when dividends are paid).

I would really appreciate some authoritative notions about pros and cons of each or perhaps something I've missed or misunderstand.

[jtax]

Here's the way I think about it. 

This assumes that you have the money to pay the whole tax bill when it is due. I.e. that you don't need to pay in advance to ensure you have the cash on April 15th. Many people can't do that, but if you can:

There is a "safe-harbor" rule that avoids late-payment penalties/interest. It is in I.R.C. 6654(d)(B) - https://www.law.cornell.edu/uscode/text/26/6654 - and it is that if

you pay either

1. 90% of what your total tax liability will be for 2022 OR
2. 100% of what your tax liability WAS for 2021 [110% if AGI > $150k]

then there will be no penalty or interest even if you had to write a million dollar check on 4/15/2023.

#1 is hard to estimate without doing your 2022 taxes, but #2 is simple and works very well if your income is increasing (badly if your income is decreasing).

So I would suggest (again if you will have the total due on 4/15/23) that find your tax liability for 2021 (1040 line 24) and make sure you have paid 100% (or 110% if AGI > $150k) of that via withholding or quarterly estimated payments. Then even if you have a huge payment to make on 4/15/2023 there will be no penalty or interest.

You can either have your pension folks up the withholding or make estimated payments as needed. That is easily done from irs.gov account or even buy mailing in form 1040-ES as needed.

https://www.irs.gov/payments

https://www.irs.gov/pub/irs-pdf/f1040es.pdf