Roth Conversion Tax Payments

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
winski58
Posts: 137
Joined: Mon Jan 28, 2013 1:59 pm

Roth Conversion Tax Payments

Post by winski58 »

Consider the following:
  • RMD from 401k for 2018 divided by 12 and distributed on the 15th of every month from January thru December to checking account.
    Additional amount transferred via ROTH conversion in December 2018.
    Total income tax calculated via TaxCaster for projected income, including RMD (but not including conversion amount) and submitted quarterly.
    File taxes in March 2019 and pay the additional tax owed for the conversion amount.
Question: Does this scenario comply with IRS regulations?
jebmke
Posts: 25474
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Roth Conversion Tax Payments

Post by jebmke »

You can file as late as October 15 and still be compliant. That doesn't mean there won't be a penalty but you will be legal.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: Roth Conversion Tax Payments

Post by kaneohe »

The tax on the conversion should be due mid Jan 2019 so if you paid in Mar 2019, you are potentially liable for a late payment
for 2 months but that depends on how much the conversion amount is compared to the other income and the safe harbor amount compared to the amount paid in 2018. Probably will be fine.
Topic Author
winski58
Posts: 137
Joined: Mon Jan 28, 2013 1:59 pm

Re: Roth Conversion Tax Payments

Post by winski58 »

Can the tax payments for the RMD be spread over 4 quarters if the total RMD is distributed to the checking account in January?
kaneohe
Posts: 6786
Joined: Mon Sep 22, 2008 12:38 pm

Re: Roth Conversion Tax Payments

Post by kaneohe »

winski58 wrote:Can the tax payments for the RMD be spread over 4 quarters if the total RMD is distributed to the checking account in January?
You get a break if you pay in 4 equal"quarterly" payments . IRS assumes your income was also in equal "quarterly" payments. You should be thinking, however, not just about chunks of income(RMD) but about all the income for the year and the safe harbor. There still that conversion income late in the yr. https://www.irs.gov/pub/irs-pdf/f2210.pdf Things are simple if you can use the short method. Less so, if you can't.
FactualFran
Posts: 2776
Joined: Sat Feb 21, 2015 1:29 pm

Re: Roth Conversion Tax Payments

Post by FactualFran »

There are many ways to avoid owing an underpayment penalty. Some ways are more complicated than others. I'll describe two relatively simple ways here.

Have enough taxes withheld for the year so the amount withheld is at least 90% of the income tax for there year.

If for whatever reasons that much will not be withheld, make sufficient quarterly estimate payments. In this case, by the payment date for the Nth quarter, N/4 of the amount withheld for the year plus the payments made by the payment due need to be at least N/4 of 90% of the income tax for the year.

Avoid the more complicated ways unless there is a strong reason to use a more complicated way.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Roth Conversion Tax Payments

Post by The Wizard »

kaneohe wrote:
winski58 wrote:Can the tax payments for the RMD be spread over 4 quarters if the total RMD is distributed to the checking account in January?
You get a break if you pay in 4 equal"quarterly" payments . IRS assumes your income was also in equal "quarterly" payments. You should be thinking, however, not just about chunks of income(RMD) but about all the income for the year and the safe harbor. There still that conversion income late in the yr. https://www.irs.gov/pub/irs-pdf/f2210.pdf Things are simple if you can use the short method. Less so, if you can't.
I'm not sure this is right. I thought quarterly estimated payments had to track income in that quarter, roughly. Get a lot of income in one quarter, then next estimated payment needs to cover it, with usual safe harbor exceptions.

But WITHHOLDING definitely is treated as being spread over the whole year if it matters...
Attempted new signature...
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Roth Conversion Tax Payments

Post by The Wizard »

In my case, I do a $1500 Roth conversion each month and have taxes withheld to cover it from other monthly income.
I will sit down in December, look at my numbers, and probably do an additional lump conversion of $10k to $20k.
I will then send in 28% estimated tax on that conversion before January 15th...
Attempted new signature...
FactualFran
Posts: 2776
Joined: Sat Feb 21, 2015 1:29 pm

Re: Roth Conversion Tax Payments

Post by FactualFran »

The Wizard wrote: I'm not sure this is right. I thought quarterly estimated payments had to track income in that quarter, roughly. Get a lot of income in one quarter, then next estimated payment needs to cover it, with usual safe harbor exceptions.
Quarterly estimated payments have to track income for that quarter if the taxpayer files Form 2210 (Underpayment of Estimated Taxes) with the Annualized Income Installment Method part filled in. Without that part filled in, the IRS does not know the taxpayer's income per quarter, and the IRS allows the usual safe harbor exceptions that are based on the income tax for the year.
Post Reply