Roth conversion and under payment penalty

[rogersdan164]

I plan on an IRA to Roth conversion at the end of 2025.  This conversion will significantly increase my income and my income taxes for the year.  Do I need to increase my regular monthly Fed tax deductions now to account for the anticipated increase in taxes for the year?  Thanks, DR

[Opus 17]

Yes, that would work.

If you have a lump sum income (conversion) in December, the IRS is going to want to see quarterly estimated tax payments that were due April 15, June 15, Sept 15, and Jan 16, 2026.  You already missed the first two payments.  You can make estimated payments in Sept and January, and then include the penalty form 2210 with schedule AI with your tax return to show the IRS that even though you did not make payments over the whole year, your payments were appropriate for your income in each quarter.

Because withholding is assumed to be evenly spread out over the whole year, even if it is not, you could increase your W-2 withholding to cover the tax, by having enough extra taken out over the last 4 months to cover the conversion taxes.

A third option is to have taxes withheld from the conversion.  Suppose you convert $20,000 and have $5000 withheld.  That will satisfy the IRS because both income and withholding are assumed to be spread out over the whole year.  Then, you can send the Roth IRA a check for the $5000, and tell them it is also a conversion/rollover.  They don't need to know or care that this is part of the same conversion.  You must send the make-up check within 60 days, and you can only use this method once per year.  But if you have the cash available to make estimated payments, this is an alternative way of getting your taxes received by the IRS in a way that avoids the penalty calculation.

Finally, if you converted in the beginning of the year (Jan-March), the IRS will want to see 4 equal payments of 1/4 each on those same dates, April, June, Sept and Jan.   That would allow you to invest the tax money in the mean time.

[robtm]

The answer is Yes you need to increase your 2025 estimated tax payments to account for the amount you convert to the Roth account.

[rogersdan164]

Thank for the prompt and detailed reply.  I have a question about option 3 - the lump sum conversion with taxes with held at the time of the conversion.  I would rather not reduce the amount of the conversion by the taxes. 1)  Can I make a lump sum payment of the taxes in December from a non-retirement account?  or - I may have misunderstood your answer - can I contribute the conversion taxes back to the Roth ?  Thanks, Dan

[VolvoGirl]

@rogersdan164   Yes.  You can make a 1040ES estimated payment from any account in December.  I always make my 4th quarter estimated payment  (due Jan 15) in December.

And yes you have 60 days to put the tax withholding on the conversion into the ROTH to make up for it.  If you have the cash outside the IRA that is the best method.  

[Opus 17]

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@rogersdan164 wrote:

Thank for the prompt and detailed reply.  I have a question about option 3 - the lump sum conversion with taxes with held at the time of the conversion.  I would rather not reduce the amount of the conversion by the taxes. 1)  Can I make a lump sum payment of the taxes in December from a non-retirement account?  or - I may have misunderstood your answer - can I contribute the conversion taxes back to the Roth ?  Thanks, Dan

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You don't have to reduce the conversion.  Let me try to explain again.

If you convert (let's say) $10,000 in December, you can make an estimated payment ($1500 or $2200 for most taxpayers) which is due no later than January 15.   However, this will still trigger a penalty, unless you include penalty form 2210 with your tax return and use the "annualized income" method, schedule AI, to show the IRS that your payments were uneven because your income was uneven.

As an alternative, you can convert the $10,000 and ask for $2200 of withholding.  That means that only $7800 goes into the new Roth IRA.  But you then take $2200 from your bank account (that you already have ready to pay the tax) and deposit that money in the Roth IRA by telling them it is an indirect rollover.   On your tax return, you don't report a $7800 conversion and a $2200 contribution, you report a $10,000 conversion.  As long as you make the separate payment within 60 days, it counts as part of the conversion.  And then, because the IRS "sees" withholding differently than payments, you won't have any need to include form 2210 with your tax return. 

[cdenorch]

I'd like a little more clarification, because I'm in the same boat.  Also, for the record, I usually receive a federal tax refund from the IRS each tax year of $2,000.  In this scenario, are you saying that for the Roth conversion of $20,000, s/he should take $5,000 out of the Roth conversion amount of $20k, thereby depositing $15k into the Roth, and then taking the $5,000 and writing a check to the IRS?  What if s/he is in the 22% tax bracket? Thanks in advance.

[cdenorch]

Thank you.  This was exactly the kind of detail I was seeking.

[Opus 17]

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@cdenorch wrote:

I'd like a little more clarification, because I'm in the same boat.  Also, for the record, I usually receive a federal tax refund from the IRS each tax year of $2,000.  In this scenario, are you saying that for the Roth conversion of $20,000, s/he should take $5,000 out of the Roth conversion amount of $20k, thereby depositing $15k into the Roth, and then taking the $5,000 and writing a check to the IRS?  What if s/he is in the 22% tax bracket? Thanks in advance.

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There is a difference between writing a check and having withholding.

In the previous example, a $20,000 Roth conversion in the 22% bracket will require paying the IRS (at some point) $4,400.

• If no money is withheld and no extra payment is made, the $4,400 will be due when the tax return is filed.  Because you are supposed to pay your taxes evenly over the year, you can be assessed an under-payment penalty even if you pay in full when you file the return.
  • If you normally expect a $2000 refund, then you will owe $2400.  This will still trigger an under-payment penalty, but it will be less, since it is based on the amount owed.
• If you convert $20,000, and you have an extra $4,400 in a bank account somewhere, you make an estimated payment to the IRS in the same tax quarter as the conversion.  However, you still can be assessed an under-payment penalty.  This is because, for $4,400 of taxes, the IRS wants to see it broken over 4 equal installments of $1100 each that were paid in April, June, Sept and January.  Even if the conversion (which is a lump sum income) occurred in let's say October 2025, the IRS wants to see payments of $1100 in April, June and September, and by not making those payments, you can still be assessed an under-payment penalty.  This penalty can be avoided (usually) by including form 2210AI with your tax return, but you have to manually select to include this form if Turbotax doesn't trigger it for you.  
  • If you normally expect a $2000 refund, then you would need to make an estimated payment of $2400, but you still need to include form 2210AI with your return to reduce the calculated penalty.
• If you convert $20,000 and you don't have $4400 to pay the taxes, then you can't afford the conversion.  You could have $4000 withheld, this means you are withdrawing $20,000 but converting $16,000.  The $4000 is a taxable withdrawal (regular tax plus a 10% penalty if you are under age 59-1/2) and the $16,000 is a taxable conversion.   The $4000 withholding goes to your account with the IRS to offset the taxes on the $20,000.  You are $400 short on taxes, but that is a small enough amount to not trigger a penalty. 
  • If you normally expect a $2000 refund, you could convert $20,000 with $2000 of withholding.  This will be entered as a $20,000 withdrawal with a $18,000 conversion and $2000 taxable withdrawal. The $2000 withholding plus the $2000 usual refund will mostly offset the taxes, leaving you with a bill for $400 (which is too small to trigger a penalty.)

Anything else?

[cdenorch]

@Opus 17 If I convert $10,000 from my IRA to a ROTH in November, and send in a 1040ES in November to the IRS, and 100% of my tax liability is covered;  then I don't need to send in a 2210?  As long as the tax for the conversion is covered within 60 days (1040ES) , and in the same year as the conversion, and all tax liability for the year for all income, is covered; correct?  Even if I were to owe the IRS less than $1,000 in additional taxes (presuming my 1040ES payment was insufficient), I would still not need to file form 2210?  Thank you.

[Opus 17]

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@cdenorch wrote:

@Opus 17 If I convert $10,000 from my IRA to a ROTH in November, and send in a 1040ES in November to the IRS, and 100% of my tax liability is covered;  then I don't need to send in a 2210?  As long as the tax for the conversion is covered within 60 days (1040ES) , and in the same year as the conversion, and all tax liability for the year for all income, is covered; correct?  Even if I were to owe the IRS less than $1,000 in additional taxes (presuming my 1040ES payment was insufficient), I would still not need to file form 2210?  Thank you.

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The IRS wants to see taxes paid evenly.  In this case, they will want to see estimated payments of $550 in April 15, June 15, and Sept 15, in addition to an estimated payment on January 15, 2026.  This is because they don't know your conversion was done in November, they just get a 1099-R for the whole year, so they assume the income was spread out over the whole year, so they want to see the tax payments similarly spread out.  

There is no 60-day rule for paying estimated taxes, they are due quarterly on the dates I gave -- for income paid between Sept 1 and December 31, the tax payment is due by January 15 (so as long as 135 days but as short as 16 days, depending on when the income is paid). 

The issue of avoiding the penalty is a gray area to me.  On the one hand, you are supposed to be able to avoid a penalty if you owe less than $1000 when you file, or if you pay in at least 100% of last years' taxes. On the other hand, it is very clear that you can be assessed an underpayment penalty even if you make a sufficient late estimated payment, because we have seen people asking for advice on that very question.  IRS information is here.

https://www.irs.gov/payments/underpayment-of-estimated-tax-by-individuals-penalty

I would still include form 2210 with schedule AI, to show the IRS that your income varied during the year but your payments in each quarter matched the income in that quarter.  Including the form when you file won't harm you if it is not needed, but omitting the form if it is needed could lead to a penalty that you then have to fight. 

Of course, if you normally expect a $2000 refund, then you are $500 overpaid for each quarter, meaning that even after the conversion is considered, you are only short $5 each quarter, and that is not enough to trigger a penalty.  

[dmertz]

If you will need to annualize income on Schedule AI of Form 2210 to avoid an underpayment penalty by showing that your income was not received evenly throughout the year, your tax return must also include Form 2210.