Updating W4, anticipating a Roth Conversion this year

[shannondaylee01]

Hello! I'm anticipating a hefty Roth conversion this year, so have updated my W4 "Other income not from jobs" to offset the inevitable tax hit.    I see the extra withholding reflected in my bi-weekly paychecks and figure it should cover the tax penalty of this conversion.

Question - Do I need to be mindful of when I do the roth conversion? Is it okay to convert in the first quarter? even though the tax is being paid slowly over the year?

I see alot of info about scheduling an estimated payment, so not sure if I'm shooting myself in the foot by doing it this way.  Appreciate any advice.

[SweetieJean]

Why not just make an estimated tax payment when you do the conversion?

[dmertz]

"Do I need to be mindful of when I do the roth conversion?"

Generally not.  As long as your tax withholding is sufficient to cover your entire tax liability for the year, it doesn't matter since, by default, your income and tax withholding are treated as being received and paid uniformly throughout the year.  Also, as long as your tax withholding is at least 100% (110% if your 2021 is greater than $150,000, $75,000 if married filing separately) of your 2021 tax liability, it doesn't matter.

The only reason that it might matter is if you do a Roth conversion early in the year and your tax withholding is insufficient to meet one of the safe harbors mentioned above.

Estimated tax payments are less desirable because, unlike tax withholding, they are treated as paid on the date they are actually paid, so you can't eliminate an underpayment for one tax quarter by making an estimated tax payment in a later quarter.  That payment would only reduce or eliminate an underpayment for the quarter in which it is paid and beyond.

[fanfare]

you can do your Roth conversion in four parts and do four quarterly estimated tax payments.

you can do the Roth conversion in any number of parts over the course of the year.

Right now the stock market is going down the toilet.

Which may or may not matter to you. It should.

[dmertz]

My earlier reply had to do with making sure one avoids an underpayment penalty if one does a Roth conversion early in the year.

As fanfare suggests, there is more to deciding when to do a Roth conversion than determining when you will need to make an estimated tax payment.  As fanfare suggests, if your IRAs are invested in stocks or stock funds, converting when the market is down and is subsequently expected to rise will allow more shares to be converted for the same tax liability than a conversion done after the rise, resulting in an overall tax savings since the subsequent rise will be tax-free when the requirements for qualified Roth IRA distributions are met.  Of course that means that you are trying to time the market to some extent.  Doing several Roth conversions throughout the year would be the equivalent of dollar-cost averaging.

[shannondaylee01]

Definitely. Seems to make most sense to do a couple conversions over the year to hedge my bets.  At this point, who knows how far things are going to tank!

[fanfare]

Converting now does not mean you have to invest now.

Did you watch the stock channel today?

The guest said the market is going to keep going down with high probability.

The cute lady host was flummoxed, she didn't quite know how to handle that information.