When to pay tax for Roth Conversion

[mayflower1000]

Hi there,

I am looking to covert my 401K to Roth 401k in the next few days before 2022 ends.  I have tax withholding in ny paycheck throughout the year.  Do I need to pay the Roth Conversion Tax via Estimated Tax for Q4 before end of 2022 (or Jan. 15, 2023), or can I pay the Roth Conversion tax when I file my tax return by April 15, 2023 without a penalty? If IRS give me a underpayment penalty, what is the %?  Could you please point me to the IRS publications/rule regarding the timing of paying Roth Conversion Tax.  I saw some people said the Tax has to be paid by Q4 2022, while others said by Tax filing deadline of 4/15/2023.  

I tried to call IRS but couldn't get through.  Urgently need an accurate answer, so I can do my Roth Conversion in the next day or two.

Thanks a lot for your help!

Virginia

[fanfare]

you won't have your 1099-R by January 15th.

The estimated tax payment No.4 can be paid up to January 15th

see Form 2210 INSTRUCTIONS for how much estimated tax you need to pay to avoid penalty.

It depends on your tax in the previous year.

@mayflower1000 

[fanfare]

It depends on your tax in the previous year.

[VolvoGirl]

If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year.  Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.  It's on 1040 line 38.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

[mayflower1000]

Thank you!

I somehow feel the "income" from Roth Conversion is different from other regular income, so we should not be required to pay the tax in the quarter we do the conversion.  Make more sense to pay by 4/15/2023 when file the tax returns.  Does anyone know and could point me to the IRS Publications on the timing of paying Roth Conversion Tax?

Thanks,

Virginia

[NCperson]

@mayflower1000   you do need to pay tax quarterly, unless you are subject to the 'safe harbor' provisions to be exempt from interest for underpaying. 

there is no such thing as a 'Roth Conversion Tax'.  it is simply income tax payable.  

Your situation is no different than someone who sells real estate or stock at a large profit and has to pay tax on that gain.  People pay quarterly taxes 'all the time' because their income is 'lumpy' each quarter and they want to avoid interest penalties for under paying.   

Your Roth Conversion just creates a "lumpy' quarter.  See Form 2210 as there are ways to be eligible for the 'safe harbor' provisions.  

[fanfare]

The IRS default calculation is SMOOTH not LUMPY.

If you have prepaid at least as much as your tax last time (110% for high-earners), then you won't be penalized no matter how much higher your income is this year.

@mayflower1000 

[jjdore]

Thanks for that good direction on how to use TT to adjust timing of income to eliminate the late penalty.  I assume the penalty was from a large end of year Roth conversion and even though I paid a large est tax bill on 1/15, TT must average it all together - unless you got through the adjust the timing of income process (which is a lot of work to figure out income by periods).  But it saved me several hundred $ so time spent worthwhile.