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Roth conversion and under payment penalty

Forum|Forum|11 months ago
August 29, 2025
28 replies
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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

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Best answer by Opus 17

Expert Reviewed

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.

O

Opus 17

Answer

Level 15

Expert Reviewed

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.

R

rogersdan164Author

Level 2

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

Level 15

@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.

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robtm

Level 10

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

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mehrdad2323

New Member

Vanguard tells me that I can replace the taxes deducted from my IRA to pay for the conversion can only be put back to IRA account and not Roth within 60 day. What are my options? Are they correct?

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NCperson

Level 15

Vanguard is correct.

Your options are what a) Vanguard stated, you can return withdrawn dollars that were withheld to pay the taxes to a Trad IRA within 60 days of the original withdrawal as “no harm no foul” (what you can’t do is reverse the whole Roth conversion transaction as it was an irrevocable transaction); once you put the money back in the Trad IRA (again within 60 days), you can then convert them to the Roth b) Alternatively, if the 60 days has passed, if you are eligible to do Roth CONTRIBUTIONS, you can contribute up to the limit for 2026.

You are dealing with multiple rule sets: 1) Trad distribution rules, 2) Roth Conversion rules (which are really a subset of Trad IRA distribution rules to me, and 3) Roth Contribution rules.

The words “conversion” and “contributions” have two very different meaning in IRA-land.

does this help?

D

dmertz

Level 15

Vanguard is incorrect. The amount withheld for taxes can be deposited into a Roth IRA as a 60-day Roth conversion. That’s entirely permissible; there is no requirement that Roth conversions be trustee-to-trustee. Of course you will have to come up with funds from another source to substitute for those withheld for taxes. Doing so would result in the entire distribution from the traditional IRA being treated as a Roth conversion instead of the Roth conversion consisting of just the portion moved directly by Vanguard. If you do not wish the amount withheld for taxes to be treated as converted to Roth, you could deposit this portion back into a traditional IRA as a rollover, provided it would not be a violation of the one-rollover-per-12-months rule. (Converting this portion to Roth does not involve the one-rollover-per-12-months limitation because Roth conversions are disregarded with respect to this limitation.) If you choose to roll the amount withheld for taxes back to a traditional IRA, you’ll still need to substitute other funds.

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NCperson

Level 15

actually, it’s a two step process.

Step 1 is to put the withheld money back into the Trad IRA using new money deposited at Vanguard. The withheld money was sent to taxing authorities and that can’t be reversed . THAT has to occur within 60 days of the original transaction.

Step 2 is to do a coversion to the Roth.

Vanguard is correct that technically the transaction can’t go from the cash deposit directly to the Roth. But certainly, Vanguard will accept the cash deposit to be put back into the TRAD IRA within 60 days. If the OP wants to then do another Roth conversion for that re-deposited amount, the OP certainly can.

please reread what the OP wrote. What I suspect the OP did not understand that once the money is placed back in the Trad IRA (the first step), the OP can authorize the 2nd Step. Vanguard won’t put the re-deposited money directly into the Roth; the two steps have to occur.

Since I am a Vanguard customer myself, I contacted them to verify and confirm this is their process.

D

dmertz

Level 15

@NCperson , unless Vanguard is referring to a Vanguard company policy of not accepting 60-day Roth conversion contributions, Vanguard is wrong. The tax code certainly permits cash from another source that is substituted for the portion withheld for taxes to be deposited straight into a Roth IRA within 60-days as a conversion contribution. Unless it’s a Vanguard-specific limitation doing it with the two-step process is unnecessary and unnecessarily involves the one-rollover-per-12-months limitation.

There is absolutely no requirement that a Roth conversion be done only by a trustee-to-trustee (Vanguard-to-Vanguard) transfer. I don’t know why Vanguard would, but if Vanguard has their own a policy of not accepting a 60-day Roth conversion contribution despite it being permissible under the tax code, the 60-day Roth conversion contribution can be made to a Roth IRA it another brokerage such as Fidelity. Fidelity’s deposit form allows for specifying that the cash deposit is to be treated as a Roth conversion contribution. I’ve done this myself when mailing a check to Fidelity that substitutes for funds withheld for taxes from a traditional IRA distribution, resulting in that portion of the traditional IRA distribution being reportable as a Roth conversion.

Doing a 60-day Roth conversion contribution instead of the two-step process also simplifies the entry of the transactions into TurboTax.

D

dmertz

Level 15

In fact, having taxes withheld and then completing the Roth conversion of the entire distribution within 60 days by substituting other funds simplifies meeting the safe-harbor of having sufficient tax withholding for each of the tax quarters of the year and avoiding an underpayment penalty without needed to annualize income on Schedule AI (Form 2210).