Estimated Taxes on IRA Withdrawals and Roth Conversions

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hawkfan55
Posts: 180
Joined: Thu Apr 03, 2014 9:04 pm

Estimated Taxes on IRA Withdrawals and Roth Conversions

Post by hawkfan55 » Tue Sep 12, 2017 12:35 pm

My DW is employed and contributing $24,000 per year towards her tax deferred 403b account. Federal and State taxes are withheld from her compensation. I am four years older(62), retired and withdrawing from my tax deferred retirement account the balance needed to meet our living expenses. I withdrew 25k during the 1st quarter and plan to withdraw an additional 25k in the 4th quarter of this year. Doing this will keep us at the top of the 15% bracket. I use prior year's TT to estimate taxes throughout the year.

Federal Estimated Tax Payments this year:
April 15 $4000 (to cover my withdrawal of $25k in the 1st quarter)
June 15 0
Sept 15 0
Jan 15 Balance to cover our total tax liability. (my planned 4th quarter withdrawal up to top of 15% tax bracket and possible Roth Conversion at 25% tax bracket)

I-ORP recommends doing some Roth Conversions during the next 5 or 6 years. If I decide to do the Roth Conversion during the 4th quarter, I will also need to pay taxes on the conversion at the 25% federal tax rate and top state tax rate. Can I also make this estimated tax payment at the payment date following the Roth Conversion date? For example, my April 15th payment assumed we would end the tax year at the top of the 15% bracket. If I do a Roth Conversion on December 1st, can I pay the 25% estimated tax for all the conversion at January 15th without incurring federal tax payment penalties?

I also try to estimate and do the same for state taxes. Is my estimated tax payment strategy sound? My understanding is that tax is due at the payment date following withdrawal and conversion. Is this correct?

Some might wonder why would DW contribute the full amount to her 403b while I withdraw from my tax deferred savings? I am reducing my RMDs when I turn 70 by spending down my deferred retirement savings while DW is able to defer taxes and delay her RMDs for a longer time since she is younger. We are not taking pensions and social security until FRA or later.

Thank you for your expertise and recommendations!

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House Blend
Posts: 4238
Joined: Fri May 04, 2007 1:02 pm

Re: Estimated Taxes on IRA Withdrawals and Roth Conversions

Post by House Blend » Tue Sep 12, 2017 9:19 pm

hawkfan55 wrote:
Tue Sep 12, 2017 12:35 pm
If I do a Roth Conversion on December 1st, can I pay the 25% estimated tax for all the conversion at January 15th without incurring federal tax payment penalties?

I also try to estimate and do the same for state taxes. Is my estimated tax payment strategy sound? My understanding is that tax is due at the payment date following withdrawal and conversion. Is this correct?
That's certainly an option, although it requires more effort to demonstrate that you've met a safe harbor. If the IRS sees estimated tax payments of $4000, $0, $0, $10,000, then from their point of view, you *might* have a shortfall in Quarter 2 or 3. They have no way of knowing *when* your withdrawals/conversions occured unless you fill out the appropriate sections of Form 2210.

An easier way requiring less documentation, if you need $8,000 total to meet a safe harbor, is to make four quarterly payments of $2,000 each. Doesn't matter when you made withdrawals or conversions from tax-deferred.

But simplest of all IMO is to pay all your taxes via withholding. All such payments are considered "on time" regardless of when the income was generated. (As long as it is during the tax year in question. Can't do it the following January.)

So for example, if you expect to withdraw $50,000 from tax-deferred and need to pay $8,000 in taxes in order to meet a safe harbor, you could withdraw $42,000 for spending at any during the year that is convenient. And schedule a special $8,000 distribution from your accounts in December in which you have 100% withheld for taxes.

Or skip the $8,000 and just increase the tax withholding from spouse's paychecks.

hawkfan55
Posts: 180
Joined: Thu Apr 03, 2014 9:04 pm

Re: Estimated Taxes on IRA Withdrawals and Roth Conversions

Post by hawkfan55 » Fri Sep 15, 2017 4:20 pm

House Blend, thank you for your reply!

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