Roth Conversion tax payment (cash)

[Taxstar58]

I want to do a Roth Conversion ($88,000) this month and I've already received my 2024 tax refund. I'm 67, not collecting S.S., $15k pension income, after my $17k standard deduction which keeps me in the 22% bracket for the conversion.  My question - how exactly do I properly pay the tax due ($15,312) after opening and funding the Roth to avoid any penalty?  I have cash.  I've read elsewhere that you can simply go to "IRS.gov/payments" and make the estimated payments.  Is this correct?  Do I have to submit any forms as well?  

[Opus 17]

Yes, you can go to www.irs.gov/payments.  You would select 2025 as the tax year and estimated taxes as the reason.  You would get a receipt, keep that for when you file, but you don't need other paperwork.

For a conversion done in April, and with no withholding, the IRS will want to see payment in full by June 15, and you will have to use the annualized method of calculating the penalty on your tax return.  Or, you can pay 1/4 of the taxes on or before April 15, June 15, Sept 15, and Jan 15, 2026, and you would not have to use the annualized method.  (Because the IRS wants tax payments spread out evenly over the year.).   So you can actually make slower payments and keep your money longer if you make one early payment (before April 15, even if the conversion settles after April 15), then you can make 3 more payments spread out.  

[Taxstar58]

Thanks Champ! 🙂  ...so, if I'm not able to get it in under the gun in April, any tax on my conversion done this year would have to be paid in full? - and then figure out the annualized penalty?  Is that done using form 2210 or just when I file next year?

[fanfare]

If your quarterly withholding plus estimates for 2025 are at least 100% / 4 = 25% ( 110% / 4 for certain high income taxpayers) of your 2024 tax, there will be no penalty on your 2025  tax return, regardless of any jump in income.
you are protected from a sudden capital gain or spike in income e.g. Roth conversion.at year end.
you know your prior year's tax when you file by April 15, which is also the first estimated tax payment due date.

@Taxstar58 

[Opus 17]

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@Taxstar58 wrote:

Thanks Champ! 🙂  ...so, if I'm not able to get it in under the gun in April, any tax on my conversion done this year would have to be paid in full? - and then figure out the annualized penalty?  Is that done using form 2210 or just when I file next year?

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Income reported on a 1099 or W-2 is assumed to be spread out over the year, even if the income is not actually spread out.  So the IRS also wants tax payments spread out over the year.  So one option is to pay 1/4 of the tax each quarter.  The other option is to make a full estimated payment in the quarter where the lump sum income occurred, then use the annualized method to show the IRS that even though the taxes were not evenly spread out, they were appropriate to each quarter's income.  This is done on form 2210, which is part of your 2025 tax return (not filed separately).  

The advantage to the quarterly method, is that if you do a conversion in the early part of the year, you can spread out the payments over the whole year and still be within the rules.  For a $20,000 tax bill, that could be $300 or more of simple interest income, even if the only thing you did was put the money in an insured high yield savings account.  

Alternatively, you can have taxes withheld from the conversion.  Then you have 60 days to deposit the extra cash into the destination IRA and have it be part of the same rollover.  Withheld taxes are also considered to be spread out over the entire year, so this avoids the under-payment penalty.  You tell the IRA that you want to convert $88,000 and withhold $20,000 for taxes.  They send $66,000 to the Roth IRA.  Then separately, you send $20,000 to the Roth IRA and just tell them "this is a rollover within 60 days".  They don't need to know (or care) that you are considering it part of the $88,000 conversion, it all works out on your tax return.   This, of course, assumes you will have the cash within 60 days.  But I think you are already planning that if you can make the estimated payment by June 15 anyway. 

Although there is the 110% rule, I am not entirely convinced that it applies to the issue of underpayment of required quarterly estimates.  I feel it would be safer to make either the correct quarterly payments or the correct single payment and include form 2210 with your return.