Roth Conversion Taxes...where to send, when to pay?

[CCRewards]

Hey all!

I asked my CPA about doing a Roth conversion, but through my conversation with him, it became clear to me that he doesn't prescribe to the Boglehead philosophy. Furthermore, he refuses to give me an appointment before the end of the year, so I can't ask him these questions...not that I'm faulting him; I understand that it's the end of the year and he's probably bombarded with tax questions and people.

I am going to convert about $94,000 into a Roth before the end of the year. With this conversion and my other income, it puts me right at the top of the 28% bracket. I know that once I do a conversion, I will be hit with a pretty hefty tax bill from the conversion. If I do this conversion within the next two weeks, when are the taxes for the federal conversion due? What about the state's cut...when are they due? Does anyone know where exactly I send the check and if I need to send a form with the check to let the IRS know what the check is for? Anyone have a link or some information on where I can read more about this process?

Thanks friends, and I hope everyone is having a safe and fun holiday season.

[whaleknives]

Tax-deferred funds transferred to a Roth account are considered income for that year. To avoid reducing your tax-advantaged total, it's generally recommended that you not withhold taxes from the transfer. The IRS expects you to pay estimated taxes quarterly (as they define quarters) on income where income tax is not withheld.

The last quarterly payment for 2016 has a due date of 1/15/17. You can pay Federal estimated taxes online. My state offers a similar service, but doesn't allow you to make more than one payment at a time.

[Copper John]

There is a line on your federal tax return for IRA distributions. Your conversion amount will be entered on this line and the amount is added to your income and you will pay taxes based on your total income after deductions and exemptions.

You also have the option to have the holder of your IRA to withdraw taxes upon your conversion. I know Vanguard asks if would like this done upon conversion and I decline and just handle it on my Federal return.

[livesoft]

There are many ways to pay taxes and/or avoid paying penalties for underpayment of taxes. The IRS is your friend.

One safe harbor to avoid a penalty for underpayment is to pay 110% of your 2015 tax liability (at least for federal taxes). So get out your Form 1040 from 2015 and look at the tax you needed to pay on Line 63. Multiply by 1.1 (that's a way to get 110%). Compare that to what you will pay in 2016 from your paychecks and other ways that you normally pay.

Take the difference, add a $1,000 or $2,000 and just ACH transfer it to the IRS (look up Direct Pay at IRS.gov). Or increase your tax withholding from the last paycheck and/or bonus checks that you will get in 2016. I don't ever send a check to the IRS, that's a solution from the 1960s.

I'd just pay this the same day I made the conversion. It probably will not be the entire amount needed, but it will be good enough.

[LeeInTN]

Remember that the full $94,000 might not be taxable if you have a basis in it, shown on your most recent IRS 8606.

[mhalley]

I would pay on Jan 15, using IRS.gov and your states online tax site. No need to specify what it is for.
From turbotax FAQ:
When are my estimated taxes due?

Never accused of oversimplifying things, the IRS doesn't break the tax year into four three-month quarters. The first quarter is three months (January 1 to March 31), but the second "quarter" is two months long (April 1 to May 31), the third is three months (June 1 to August 31) and the fourth covers the final four months of the year.

The installment payments are due on April 15, June 15, September 15 and January 15 of the following year. You can skip the final payment if you will file your return and pay all the tax due by February 1. If a due date falls on a weekend or legal holiday, the deadline is pushed to the next business day.

You don't have to make any payment until you have income on which estimated taxes are due. If you know early in the year that you will have to make estimated payments, each of the four payments should be 25% of the amount due.

But what if you receive income during the third quarter that, for the first time, makes you liable for estimated tax payments? Your first payment would be due on the third installment date—September 15—and you are expected to pay 75% of the tax that is due.

[jimcrawford01]

Where on the Form 1040 is the penalty for underpayment exacted? Is there an additional Form that you must do and input somewhere on the Form 040?

BTW, great idea from a previous poster : if in doubt, pay 110% of last year's tax by 15JAN17.

Is Direct Pay and EFPTS the same program?

Sorry, didn't mean to hijack the thread. Thanks.

Jim

[livesoft]

Is Direct Pay and EFPTS the same program?

No, definitely not.

[Wakefield1]

I have paid Estimated Tax once (all in one payment,one check,one Estimated Tax Ticket) for my conversion tax calculation and IRS did not harm me (refund for the year was prompt)
If doing a Roth Conversion I like to make sure that I'm not bumping myself into a higher bracket. I have only done partial conversions out of my IRA into my Roth IRA Remember the State too,they want theirs and might not be as forgiving of a mistake as IRS
when you send or use Internet to order forms from IRS and State of Virginia you can order Estimated Tax tickets. I paid by check so I have a record of it being cashed.
Seem to be a couple other threads on this topic floating around.

[Epsilon Delta]

Where on the Form 1040 is the penalty for underpayment exacted? Is there an additional Form that you must do and input somewhere on the Form 040?

Form 2210

[gotlucky]

I am going to convert about $94,000 into a Roth before the end of the year. With this conversion and my other income, it puts me right at the top of the 28% bracket. I know that once I do a conversion, I will be hit with a pretty hefty tax bill from the conversion.

Are you sure you want to do this conversion? Are you confident you will never make under $230k if MFJ for the remainder of your life (adjusted for inflation)?

The only compelling reasons to convert to a Roth are if 1) you're fairly confident your marginal rate w/conversion is lower now than it ever will be in the future, 2) you want to avoid RMDs and intend on leaving a tax-free stretch option for your beneficiaries, or 3) you want to decrease the size of your estate because you'll be subject to estate taxes. The lack of RMDs and stretch option for your heirs is probably the most compelling reason. Mathematically, there is no advantage to converting now if you will be in the same 28% bracket when you withdraw.

I definitely convert when I'm in the 15% or lower bracket. In fact, I converted when they first offered in 1998 and let me spread the liability over 4 years when I had little other taxable income; I effectively converted at 0% and no more than 10%. That was a great deal for me. If I convert in the 25% marginal rate, I start worrying about congress one day try to tax Roth IRAs (SS was never supposed to be taxed but now it is) or that we may switch to a VAT system. I feel very comfortable having a mixture of Roth and Traditional IRAs that can be drawn-down or left to my heirs tax efficiently, ie my starving-artist kid will get the traditional IRA but my high-income earning kid will get the Roth.

If, however, you have rental income or some other income that will only continue to grow for the remainder of your life, then converting now might be worthwhile.

[grabiner]

Mathematically, there is no advantage to converting now if you will be in the same 28% bracket when you withdraw.

This is correct only if you pay taxes from the IRA. If you pay taxes from a taxable account, you come out ahead converting from traditional to Roth when you retire in the same bracket, and may even come out ahead converting in the 28% bracket when you retire in the 25% bracket.

[CCRewards]

Tax-deferred funds transferred to a Roth account are considered income for that year. To avoid reducing your tax-advantaged total, it's generally recommended that you not withhold taxes from the transfer. The IRS expects you to pay estimated taxes quarterly (as they define quarters) on income where income tax is not withheld.

The last quarterly payment for 2016 has a due date of 1/15/17. You can pay Federal estimated taxes online. My state offers a similar service, but doesn't allow you to make more than one payment at a time.

Thank you so much! This is the exact answer I was looking for! Now, I just have to figure out my state's own details (Louisiana, if anyone knows off the top of his/her head)!

There is a line on your federal tax return for IRA distributions. Your conversion amount will be entered on this line and the amount is added to your income and you will pay taxes based on your total income after deductions and exemptions.

You also have the option to have the holder of your IRA to withdraw taxes upon your conversion. I know Vanguard asks if would like this done upon conversion and I decline and just handle it on my Federal return.

Thanks. I'm ready to listen to my CPA throw a fit for ignoring his advice when it comes to filling out the federal tax returns. The reality is that it's my money and my decision, though!

I opted to not have any taxes withdrawn from the conversion itself as I want the larger balance in there.

One safe harbor to avoid a penalty for underpayment is to pay 110% of your 2015 tax liability (at least for federal taxes). So get out your Form 1040 from 2015 and look at the tax you needed to pay on Line 63. Multiply by 1.1 (that's a way to get 110%). Compare that to what you will pay in 2016 from your paychecks and other ways that you normally pay.

Take the difference, add a $1,000 or $2,000 and just ACH transfer it to the IRS (look up Direct Pay at IRS.gov).

I also like this idea. I'm pretty sure that it will result in a slight underpayment for me, but if paying 110% is all it takes to avoid the penalty (I assume you do the extra $1,000-$2,000 to try to pay closer to the actual tax liability), that's a few more months/weeks of savings account interest in my hand.

Remember that the full $94,000 might not be taxable if you have a basis in it, shown on your most recent IRS 8606.

Oh man, I wish I had this "problem!" Unfortunately, all of it is taxable for me.

I would pay on Jan 15, using IRS.gov and your states online tax site. No need to specify what it is for.

Thanks! It helps knowing that I don't have to specify the reason for the extra payment.

Sorry, didn't mean to hijack the thread. Thanks.

No worries! I find your question relevant to the thread.

I have paid Estimated Tax once (all in one payment,one check,one Estimated Tax Ticket) for my conversion tax calculation and IRS did not harm me (refund for the year was prompt)
If doing a Roth Conversion I like to make sure that I'm not bumping myself into a higher bracket.

I'm hoping for a prompt refund as well (if I'm due one), but am kind of at the mercy of my CPA! The reason for my strange number conversion ($93,900) is that I am straddling my tax bracket's upper limit. I haven't kept the best track of my bank account opening bonuses this year, but I'm hoping I come in slightly below my limit!

The only compelling reasons to convert to a Roth are if 1) you're fairly confident your marginal rate w/conversion is lower now than it ever will be in the future, 2) you want to avoid RMDs and intend on leaving a tax-free stretch option for your beneficiaries, or 3) you want to decrease the size of your estate because you'll be subject to estate taxes. The lack of RMDs and stretch option for your heirs is probably the most compelling reason. Mathematically, there is no advantage to converting now if you will be in the same 28% bracket when you withdraw.

I subscribe to your reason number 2. My TSP is close to $1,000,000, and at my current rate of conversion, I will have to RMD about $150,000. I also am setup in such a way that I will probably only be withn this tax bracket (or higher) for the remainder of my life.

I know it's also not as much of a concern, but it also makes sense to me to convert when we know tax brackets...given all the talk about changing them, waiting it out might be detremental. I prefer the certainty now vs. the uncertainty then (as waiting could just as likely result in a net loss to me as a net gain).

If you pay taxes from a taxable account, you come out ahead converting from traditional to Roth when you retire in the same bracket

Not only this, but I'm infinitely more interested in the lack of RMDs for myself in a Roth.

[cherijoh]

Hey all!

I asked my CPA about doing a Roth conversion, but through my conversation with him, it became clear to me that he doesn't prescribe to the Boglehead philosophy. Furthermore, he refuses to give me an appointment before the end of the year, so I can't ask him these questions...not that I'm faulting him; I understand that it's the end of the year and he's probably bombarded with tax questions and people.

You might be interested in James Lange's website. He is a strong proponent of Roth conversions and free pdf versions of several of his books and peer-reviewed articles are available from his website.

[CCRewards]

You might be interested in James Lange's website. He is a strong proponent of Roth conversions and free pdf versions of several of his books and peer-reviewed articles are available from his website.

Thank you so much for this link! I'm reading all his free books! So glad you linked me to a CPA who believes in the same investing philosophies as I do....perhaps it's time I considered switching!