When are taxes due on Roth IRA rollover?

[ktm29564]

I have been retired for 5 years and am receiving deferred compensation (fully taxable) from my former employer.  This year, I will only receive $30,000 in deferred compensation and so I elected to roll over $200,000 from my 401k into an IRA and then into a Roth IRA in January.  I will pay taxes on the rollover from my bank account reserves.  My question is,  when do I pay the taxes on the rollover?  Do I pay now, in the quarter the rollover occurred?  Do I pay one quarter every quarter this year as estimated tax?  Or can I just pay it all before the end of the year?  I will receive half of the deferred compensation in February and the remaining half in August (taxes will be withheld by mu previous employer).

Thanks in advance,

Keith

[MinhT1]

The rollover from the IRA to a Roth IRA will be taxable. If federal (and state if applicable) tax has not been withheld, you'll need to pay estimated tax. The way to proceed would be to estimate the tax due (taking into account your deferred compensation in 2020 and the tax withheld) and to pay it in 4 equal installments on 4/15/2020, 6/15/2020, 9/15/2020 and 1/15/2021.

[ktm29564]

Thanks.  So I don't need to pay the entire tax liability in the quarter in which it was incurred?

[dmertz]

Unless you need to annualize income on Schedule AI of Form 2210 to avoid an underpayment penalty because you did not have sufficient tax withholding and sufficient estimated tax payments throughout the year, your income is treated as having been received uniformly throughout the year, so sufficient equal estimated tax payments for each of the 4 quarters of the year will avoid an underpayment penalty.  If you do end up having an underpayment penalty and you made estimated tax payments equally in each of the 4 quarters instead of paying it for the Q1 tax quarter in which this large amount of income was actually received, annualizing income will not reduce your penalty.

[ktm29564]

OK, thanks.  If I understand both kind responses, I should pay 1/4 of the estimated tax liability by the required quarterly deadlines and not all at once in the first quarter.   What confused me was the following statement on the turbotax website:

"Should I pay in equal amounts?

Usually, you pay your estimated tax payments in four equal installments. But you might end up with unequal payments in some circumstances:

• If you had your previous year's overpayment credited to your current year's estimated tax payments
• If you don't figure your estimated payments until after April when the first one is due
• If you unexpectedly make a lot of money in one quarter"

I interpreted the last statement as having to pay the entire rollover tax liability in the quarter it was incurred(?)

[dmertz]

This issue depends on which quarter of the you receive the unexpected income.  If that unexpected income occurs in a later quarter of the year, you might not have made large enough quarterly payments in earlier quarters to accommodate the unexpected income without in underpayment penalty unless you make a payment for the quarter that the income was received that is large enough when combined with the earlier payments to accommodate all of the tax liability incurred to that point in the year (because you will need to annualize income to avoid the penalty).  However, if the unexpected income occurs in the first quarter this income won't be unexpected at the date of your first estimated tax payment when you can calculate the amount of equal quarterly payments needed to sum to your overall tax liability for the year (avoiding annualizing income).

[ktm29564]

OK, I think I understand.  In my case, I made the rollover in January (and therefore incurred the tax liability in January).  I estimate (pretty accurately) that I will owe approximately $45,000 in taxes on that rollover.  Because I know the amount I will owe, I can pay $11,250 by each of the 4 quarterly deadlines in 2020 and not have to pay the entire $45,000 by April 15 of this year.

[dmertz]

Yes.  That assumes that the estimated tax payments plus any withholding you have during the year will cover within $1,000 your entire tax liability for the year.  If $11,250 per quarter is not sufficient to do that after factoring all of your other income and tax withholding, you'll probably have a small underpayment penalty.  You might want to overestimate your tax liability slightly and make slightly larger quarterly estimated tax payments for the first few quarters.  You can always reduce your later estimated tax payments if you find that you will have paid too much otherwise.  For example, make $12,000 estimated tax payments for the first three quarters, then at the end of the year after you generally know your entire tax liability, adjust your 4th quarter payment.