Paying Estimated Tax on IRA Conversion

[rdh]

I recently took a portion of my Traditional IRA and converted it to a Roth IRA.  I did not have any withholding taken out when I did this.  Can I do a 1040ES estimated tax form to pay estimated taxes for this IRA withdrawal?  I am over 59 1/2.

[Critter-3]

Of course ...  you can pay the IRS directly online :  https://www.irs.gov/payments

And don't forget the state if needed. 

[mesquitebean]

NOTE:  First of all, I am NOT a tax person, but a fellow user, so keep that in mind.  I'm not offering advice, but I'll tell you how I handle unexpected income, such as a conversion, in my situation.

Without regard to the conversion, by the end of this tax year--either through withholdings or estimated payments--will you have paid at least the same amount of Federal tax as your total tax liability on your 2019 return?

I personally do not pay the tax upfront on any conversions as long as by the end of the year I know I will have ended up paying through withholding and/or estimated payments at least the same amount as 100% of the total tax liability I owed and paid the prior year.  That's called a Safe Harbor exception to avoid an underpayment penalty.    Another safe harbor is if at the end of the year you will have paid at least 90% of your final current year 2020 total tax liability.   There's a bit more detail to Safe Harbor rules, such as having to have paid at least 110% of prior-year total  tax liability if your AGI is over $150,000 (over $75,000 if married filing separately), or at least the 90% of total tax liability on the 2020 return.   There are also special rules for farmers and fishermen.

Again, as I mentioned, I'm not a tax person, so I'll have to leave it to any others to discuss more details of the Safe Harbor rules. 

But here is an IRS publication that may be helpful to you, which explains the rules in more detail:

Pub. 505 - Tax Withholding and Estimated Tax

https://www.irs.gov/pub/irs-pdf/p505.pdf

NOTE:  These are Federal rules.   it's possible your state has estimated taxes rules that differ from the Federal Safe Harbor rules.

[rdh]

Thanks for the info.  Great explanation of the Safe Harbor rule.  I'll do estimates to see if that possibly can apply.

[dmertz]

Note that the safe harbors apply on a per-quarter basis, so meeting a safe harbor at the end of the year doesn't necessarily avoid underpayment penalties for earlier quarters.  If you do a Roth conversion early in the year, you could still have penalties for the earlier quarters if you didn't pay a sufficient amount of estimated taxes in the earlier quarters or have enough taxes withheld throughout the year.  However, since you did the Roth conversion recently, presumably in the 4th tax quarter (after September 30), annualizing income on Form 2210 Schedule AI, which can be a rather onerous task unless you have already tracked income and deductions throughout the year, will often eliminate the penalties for earlier quarters by treating the income from the Roth conversion as occurring all in the last quarter instead of the default treatment of treating all income as having been received uniformly throughout the year.

[rdh]

I did the conversion in the 4th quarter.  One question:  If I can withhold enough out of my income from my job and pension (military retirement) to cover the tax on the conversion, can I avoid having to do an estimated tax payment and penalty?

[VolvoGirl]

Yes but be sure the withholding covers your total taxable income.

[dmertz]

Using withholding instead of estimated tax payments to meet your federal tax liability for the year has the advantage that, unlike estimated tax payments, the withholding is treated by default as having been withheld uniformly throughout the year.  This would potentially avoid having to annualize income and deductions to eliminate possible penalties for earlier quarters that might be necessary with paying estimated taxes.