Roth IRA conversion my only "income" and when/how to pay taxes

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capsaicinguy
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Joined: Thu Sep 29, 2016 9:00 am

Roth IRA conversion my only "income" and when/how to pay taxes

Post by capsaicinguy » Fri Oct 06, 2017 5:58 pm

Hello fellow bogleheads, I have a tax question for you all. I am a professional student and my wife a stay at home mom. Earlier this year, I did a roth conversion of some of our IRA balance to take advantage of this period of zero income. I did not have taxes taken out of this conversion, electing to pay them later. The total amount was about 22k converted. We have two kids and thus significant deductions as a result. Did I make a mistake (and possibly incur a penalty) by not having paid estimated taxes on this? How do you handle taxes in a situation like mine where your entire "income" for the year will be solely from a roth conversion? I'm concerned I may have mistakenly assumed I could just settle up at year end and be ok.

mhalley
Posts: 5210
Joined: Tue Nov 20, 2007 6:02 am

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by mhalley » Fri Oct 06, 2017 6:07 pm

If 22k is your entire income, you should get a refund. Run taxcaster to be sure.

https://turbotax.intuit.com/tax-tools/c ... taxcaster/
If you had owed taxes, then you should have paid quarterly estimated taxes.
https://turbotax.intuit.com/tax-tools/t ... 12007.html

capsaicinguy
Posts: 20
Joined: Thu Sep 29, 2016 9:00 am

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by capsaicinguy » Fri Oct 06, 2017 6:15 pm

Thank you for the reply, taxcaster was what I was basing my numbers/calculations on (and yes it shows a refund when I put my numbers in), but I was concerned that I was going to get hit with a penalty for not having paid anything in. I just wanted to ask here since you all are very knowledgeable. This forum is great and I have learned a TON reading on here, I don't tend to post much unless I have a hard time finding information about my specific situation. Thanks! :sharebeer

clydewolf
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Joined: Tue Jul 21, 2015 12:51 pm

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by clydewolf » Fri Oct 06, 2017 7:56 pm

How do you qualify for a refund with no earned income?
You need earned income for the Earned Income Tax Credit (EITC).
You need earned income for the Child Tax Credit.

When your only income is from a Roth Conversion, you may not have any income tax to pay, but I don't see a refund.

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FiveK
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Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by FiveK » Fri Oct 06, 2017 9:34 pm

capsaicinguy wrote:
Fri Oct 06, 2017 6:15 pm
Thank you for the reply, taxcaster was what I was basing my numbers/calculations on (and yes it shows a refund when I put my numbers in)....
clydewolf wrote:
Fri Oct 06, 2017 7:56 pm
How do you qualify for a refund with no earned income?
You need earned income for the Earned Income Tax Credit (EITC).
You need earned income for the Child Tax Credit.
When your only income is from a Roth Conversion, you may not have any income tax to pay, but I don't see a refund.
clydewolf's comments seem correct.

TaxCaster has so many (over)simplifications that I would not suggest its use.

Seems either the "what if?" worksheets of full TurboTax, TaxAct, etc. or the spreadsheet at Tools and calculators - Personal_finance_toolbox - Bogleheads should be better - if you try any of those, what do you get?

But to your main question, "Did I make a mistake (and possibly incur a penalty) by not having paid estimated taxes on this?" - no, you had no need to pay estimated tax if the $22K is your only 2017 income.

DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by DSInvestor » Fri Oct 06, 2017 9:41 pm

clydewolf wrote:
Fri Oct 06, 2017 7:56 pm
How do you qualify for a refund with no earned income?
You need earned income for the Earned Income Tax Credit (EITC).
You need earned income for the Child Tax Credit.

When your only income is from a Roth Conversion, you may not have any income tax to pay, but I don't see a refund.
A refund may be possible if OP receives a premium tax credit on an ACA health insurance plan.

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FiveK
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Joined: Sun Mar 16, 2014 2:43 pm

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by FiveK » Fri Oct 06, 2017 10:25 pm

DSInvestor wrote:
Fri Oct 06, 2017 9:41 pm
A refund may be possible if OP receives a premium tax credit on an ACA health insurance plan.
True, but the shortcut estimates probably don't address that.

Although, it is surprising that TaxCaster would have suggested a refund with only the $22K tIRA withdrawal and no other income, so we may not know the whole story....

capsaicinguy
Posts: 20
Joined: Thu Sep 29, 2016 9:00 am

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by capsaicinguy » Sat Oct 07, 2017 8:36 am

Ok, I think I know where I made a silly error in all of this using tax caster. I was also confused why it was showing a refund and no I haven't been trying to obfuscate details. I had been putting the 22k roth conversion in under the income section. If I put the 22k under the "Pension/IRA distribution" section it won't give me any numbers and recommends turbotax deluxe.

If I put the 22k under tIRA distribution the MMM spreadsheet it shows 0 in the net tax cell, if I put it in under income it shows a large refund. However, when I look at form 8606 it would go in under part 2, then be reported in the income section of form 1040. I think that is where the confusion is coming from for me. Either way, I think we will be fine but it would have been nice to get a refund! Sorry if this was a really basic question, taxes and how some of these taxable events are handled is definitely not my wheelhouse. :D

clydewolf
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Joined: Tue Jul 21, 2015 12:51 pm

Re: Roth IRA conversion my only "income" and when/how to pay taxes

Post by clydewolf » Sat Oct 07, 2017 9:47 am

DSInvestor wrote:
Fri Oct 06, 2017 9:41 pm
clydewolf wrote:
Fri Oct 06, 2017 7:56 pm
How do you qualify for a refund with no earned income?
You need earned income for the Earned Income Tax Credit (EITC).
You need earned income for the Child Tax Credit.

When your only income is from a Roth Conversion, you may not have any income tax to pay, but I don't see a refund.
A refund may be possible if OP receives a premium tax credit on an ACA health insurance plan.
Thanks, I missed that one.

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