IRA Tax withholding

[t9542df]

I made a partial withdraw from a regular IRA. I then moved all of that money into a roth which allowed in kind transfers. I then paid for the withholding using other funds. I sent the withholding as a quarterly tax and was penalized for not paying quarterly tax on it for the whole year. The withdraw and the check sent to the IRS was in the same quarter within a couple days. How do I avoid this in the future so I am not penalized?

[fanfare]

You sent an Estimated Tax payment.

What is your 2023 tax ? do you have withholding taken in 2024?
If your total 2024 withholding alone is 100 % of that amount ( 110% if your 2023 AGI is over $150,000),

You don't need to make estimated tax payments. This is the prior year's tax rule.

If you got a 2023 refund this year and 2024 earnings are comparable then your 2024 withholding may already meet the prior year's tax rule.

A Roth Conversion can likely upset this.

@t9542df 

[SteamTrain]

@t9542df   The default calculation used for determining an underpayment penalty?   

That assumes that all of the IRA withdrawal was made evenly over the months of the year, thus resulting in underpayment penalties for some of the quarters.  There is nothing on the 1099-R that indicates when exactly the distribution was made.  So to either reduce, or possibly eliminate the penalty, you prepare the form 2210AI form (Annualized Income) to indicate exactly how much income was made in each quarter of the year, and exactly when your withholding and estimated payments were made.   This is accessed on the "Other Tax Situations" tab in the software, in the "Underpayment Penalties" section.

Generally, that form can be a pain, because you have to gather all your info for the year and subdivide it by so-called quarters (3mo, 2mo, 3mo, 4mo), and having done it once, I haven't bothered to use it for an occasional penalty less than $50.

________________

But yeah, one fairly easy way to avoid/minimize penalties, or having to work with the form 2201AI in the future, is to increase your actual tax withholding from W-2 income, or other pension income during the year, such that it covers the taxes for any planned IRA withdrawals/conversions to a ROTH IRA during the year.   Of course, those who have significant Mutual Fund holdings in taxable accounts can't know what level of distributions will happen near year-end, and possibly mess up their tax payment plans for the year.

[Opus 17]

Unfortunately, this is a consequence of how withholding is treated differently from estimated payments.  Income and withholding are both assumed to be spread out over the year, even if they are not, but payments are made on the date made.  This means that if you make a withdrawal late in the year, and make a payment, it will look like you under paid your taxes over the earlier part of the year. 

By using form 2210AI, you can show the IRS that when your income is viewed on a quarterly basis, you made the appropriate payments.  I would prepare the form and send it to the IRS in response to your penalty letter.

In the future, you could have the taxes withheld from your conversions by doing an indirect rollover, where you get a check (or electronic deposit). For example, if you withdraw $10,000 and have $2000 withheld, IRA #1 will send you $8000.  But you are still allowed to send the full $10,000 to Roth IRA #2, which allows you to make up the difference from other money.  The only catch is you can only do this type of indirect conversion once per calendar year.   Or, do your conversions in the first quarter of the year, and then pay the tax all at once or in 4 equal quarterly installments. 

[t9542df]

Thanks for the replies. I did fill out form 2210AI but not sure I selected the correct box in part 2 of the form. What does request waiver for total amount do? I would think I would select box c but not sure. I have to do something similar this year so I need to figure it out. Withdraw is sizeable and beyond what I can recapture by claiming more on my income. I think your idea of using two accounts makes things much more simple and may go that route to eliminate all the additional headaches. Thank You.

[Mike9241]

box c is used to indicate you are using the annualized income installment method to reduce or eliminate your penalties. there is no waiver. if there are still penalties you either pay them or wait for a bill. 

boxes a or b are for waiver purposes

To request any of the above waivers, do the following.
1. Check box A or box B in Part II, as applicable.
a. If you checked box A, complete only page 1 of Form 2210 and
attach it to your tax return (you aren't required to figure the
amount of penalty to be waived).
b. If you checked box B, complete Form 2210 through line 18
without regard to the waiver. Enter the amount you want waived
in parentheses on the dotted line next to line 19. Subtract this

amount from the total penalty you figured without regard to the
waiver, and enter the result on line 19 .
2. Attach Form 2210 and a statement to your return explaining the
reasons you were unable to meet the estimated tax requirements
and the time period for which you are requesting a waiver.
3. If you’re requesting a waiver due to retirement or disability, attach
documentation that shows your retirement date (and your age on
that date) or the date you became disabled.
4. If you’re requesting a waiver due to a casualty, disaster (other than
a federally declared disaster, as discussed next), or other unusual
circumstance, attach documentation such as copies of police and
insurance company reports.