Roth conversion

[nicanor_65]

We did a Roth conversion last December.  Can we pay the taxes on the converted amount on April 15, when we file our tax returns, and avoid an underpayment penalty, as long as we qualify for one of the safe harbors?

[MaryK4]

Yes, if you quality for one of the safe harbor penalties, you will not incur the penalty for underpayment of estimated taxes, so you do not have to pay the taxes due until April 15th.

[nicanor_65]

We would like to do another Roth conversion later this year.  We would like to wait until December, when we'll have a better idea of our taxes owed.  We do not expect to qualify for the same safe harbor when filing our 2025 taxes, since the Roth conversion we did this year pushed our income so high.

We are thinking of doing estimated tax payments this year to cover the taxes on the Roth conversion later this year, and thus qualify for a safe harbor.  Can the 4 estimated tax payments be made with unequal amounts?  If the conversion is done in December, can most of the estimated tax be paid on the Q4 installment?  Or would the IRS assess us an underpayment penalty because the Q1-Q3 payments were lower than the Q4 pament?

[MaryK4]

Yes, you would have to re-calculate the safe harbours for 2025 to make sure you qualify- TurboTax calculates the Estimated Tax Payment coupons included with your return based on your 2024 tax liability, so that will qualify you for the safe harbour.  However, if you do wait until December, you will use the annualized method next year to place the income in the fourth quarter so the estimated tax payment would not be due until January 15th.  @nicanor_65

[nicanor_65]

So if we do the Roth conversion in December, we can pay the entire tax bill we think will be due on that amount on the Jan. 15 payment, and the IRS won't assess any underpayment penalty?  And the other 3 payments can all be zero?

If so, can you explain how to use the annualized method?  I assume there is a form for this?

[MarilynG1]

Yes, you can do that.  There  is a worksheet for using the Annualized Method.  In the interview for the underpayment penalty on Form 2210, you're asked it you want to annualize your income.

Here's more info on Form 2210 and Annualizing Income.

@nicanor_65 

[nicanor_65]

The Roth conversion we did in Dec. 2024 was a partial conversion from a 403b plan. The firm where the Roth is invested said there's a 5-year holding period before we can take penalty-free withdrawals from that Roth (the account holder is past the age of 59 1/2). If we do another partial conversion in 2025 from the same 403b plan into the same Roth account we converted into in 2024, is the 2025 conversion also subject to its own 5-year holding period? Or would it be 4 years now, since it would be part of the Roth account opened in 2024?

[fanfare]

It is too late now to do anything about it.

What does your 1040 show on the penalty line, Line 38  ?

@nicanor_65 

[VolvoGirl]

If you have a penalty 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.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

If you have the desktop program you can switch to Forms Mode (click forms in the upper right (left for Mac)) and open the 2210 form.  If the 2210 doesn't show up in the left column, click on Open Forms at the top of the left column.  Type 2210 in the search box and open the 2210 form.  Check box C to let the IRS calculate it.

[fanfare]

The prior year's tax rule applies only to withholding.

If you satisfy with withholding you don't have to make Estimated Tax payments.

you must within 60 days deposit yourself the withholding amount into your Roth to get the full intended conversion.