IRS treatment of tax liability for Roth conversion (calendar year)?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
User avatar
Topic Author
FIREchief
Posts: 5334
Joined: Fri Aug 19, 2016 6:40 pm

IRS treatment of tax liability for Roth conversion (calendar year)?

Post by FIREchief »

Scenario: taxpayer makes a large Roth conversion during December and adds newly generated tax liability to fourth quarter estimated tax payment (due January 15 the following year). Assume taxpayer paid estimated taxes/withholding the prior three quarters to satisfy tax liabilities incurred during those quarters. Therefore, the estimated tax payments are not level, with a much higher fourth quarter payment. Will the IRS impose a penalty for underpayment the first three quarters? In other words, will the IRS treat the Roth conversion as income during the fourth quarter or will they treat it as income spread over the entire tax year. Thanks.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
earlyout
Posts: 1432
Joined: Tue Feb 20, 2007 5:24 pm

Re: IRS treatment of tax liability for Roth conversion (calendar year)?

Post by earlyout »

IIRC they will treat it as income spread over the year. However, you can avoid the penalty by correctly filling out and including IRS form 2210 when you file your tax return.
Chicago60
Posts: 488
Joined: Tue Jan 29, 2013 3:40 pm

Re: IRS treatment of tax liability for Roth conversion (calendar year)?

Post by Chicago60 »

FIREchief wrote: Sat Jul 25, 2020 1:43 pm Scenario: taxpayer makes a large Roth conversion during December and adds newly generated tax liability to fourth quarter estimated tax payment (due January 15 the following year). Assume taxpayer paid estimated taxes/withholding the prior three quarters to satisfy tax liabilities incurred during those quarters. Therefore, the estimated tax payments are not level, with a much higher fourth quarter payment. Will the IRS impose a penalty for underpayment the first three quarters? In other words, will the IRS treat the Roth conversion as income during the fourth quarter or will they treat it as income spread over the entire tax year. Thanks.
A penalty will be assessed, unless you file a form 2210. That happened to us last year. I should have filed, but did not, a Form 2210 with the tax return. IRS took penalties from our expected refund. I then called IRS and explained the uneven income for the year, and was told to file 2210, which I did. We are waiting for the balance of the refund.
User avatar
Topic Author
FIREchief
Posts: 5334
Joined: Fri Aug 19, 2016 6:40 pm

Re: IRS treatment of tax liability for Roth conversion (calendar year)?

Post by FIREchief »

Thanks for the responses. I am familiar with 2210, as I had to file it at least once before (I owed penalties, but had lumpy income so the 2210 reduced the amount I owed). It sounds like it is as I had hoped. I'm looking at a large Roth conversion year (all fixed income holdings, so little reason to accelerate to early in the year) followed by a zero LTCG year, so if I can defer sales of appreciated equities to cover the tax liability until January of the following year (i.e. in time for the Jan 15 estimated tax payment), I'll avoid paying 15% CG tax plus 3.8% NIIT. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
Post Reply