Tax withholding for Roth Conversion

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elmo14226
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Joined: Thu Aug 20, 2015 10:14 am

Tax withholding for Roth Conversion

Post by elmo14226 » Thu Dec 06, 2018 11:56 am

I am considering a large Roth conversion this month but I do not want to incur a penalty for under-withholding. A Fidelity rep told me that there would be no penalty and the conversion does not count in the calculation. However, in a sidebar in the latest edition of Kiplinger's Retirement Report, it says that I should submit a fourth-quarter estimated tax payment by 1/15/19 to avoid an underpayment penalty.

Which one is correct? I retired this year so my withholdings to date are less than last year's taxes.

TBillT
Posts: 453
Joined: Sat Sep 17, 2011 1:43 pm

Re: Tax withholding for Roth Conversion

Post by TBillT » Thu Dec 06, 2018 12:36 pm

elmo14226 wrote:
Thu Dec 06, 2018 11:56 am
I am considering a large Roth conversion this month but I do not want to incur a penalty for under-withholding. A Fidelity rep told me that there would be no penalty and the conversion does not count in the calculation. However, in a sidebar in the latest edition of Kiplinger's Retirement Report, it says that I should submit a fourth-quarter estimated tax payment by 1/15/19 to avoid an underpayment penalty.
I am in the same boat.
There was thread last week that addressed this partially. You and I could both use a little more help on how to do.

Briefly, the conversion will incur possible underpayment penalties. There are several ways to avoid this penalty.
What I was thinking was annualizing the income on the tax return, but the experts say that is very complicated and cumbersome burden.
So I think we can alternatively pay the withholding tax from the IRA transfer, and refund the Roth within 60 days to cover that portion.

PS- The withholding tax from IRA withdrawal is considered to be paid over the whole year, so it gets you out of the under-payment appearance from the tax return perspective.
Last edited by TBillT on Thu Dec 06, 2018 12:52 pm, edited 2 times in total.

Silk McCue
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Re: Tax withholding for Roth Conversion

Post by Silk McCue » Thu Dec 06, 2018 12:40 pm

elmo14226 wrote:
Thu Dec 06, 2018 11:56 am
I am considering a large Roth conversion this month but I do not want to incur a penalty for under-withholding. A Fidelity rep told me that there would be no penalty and the conversion does not count in the calculation. However, in a sidebar in the latest edition of Kiplinger's Retirement Report, it says that I should submit a fourth-quarter estimated tax payment by 1/15/19 to avoid an underpayment penalty.

Which one is correct? I retired this year so my withholdings to date are less than last year's taxes.
The Fidelity representative is wrong in saying that the conversion does count in the calculation. It does. I know this from personal experience having made two substantial conversions over that past couple of years.

You should definitely rough out your taxes and make a January estimated tax payment as Kiplinger suggests by 1/15/19. No use in not doing so and potentially creating a problem that doesn't need to occur since your taxes are due in April.

Cheers

megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Tax withholding for Roth Conversion

Post by megabad » Thu Dec 06, 2018 12:52 pm

As above, you will need to run through 2210 to determine what you should do. A Q4 estimated tax payment may or may not prevent an underpayment penalty. Remember that you must have paid enough each "quarter", not just in the last. For most, the most surefire way to safely avoid underpayment is overwithhold from your W2 job, SS, or RMDs. Of course, even this has limits and requires knowing pretty closely what your income will be ahead of time.

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FiveK
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Re: Tax withholding for Roth Conversion

Post by FiveK » Thu Dec 06, 2018 6:31 pm

TBillT wrote:
Thu Dec 06, 2018 12:36 pm
What I was thinking was annualizing the income on the tax return, but the experts say that is very complicated and cumbersome burden.
Depends on your record keeping practices and spreadsheet ability.

If you toss everything into a shoe box and wait for the end of year statements (W-2, 1099, etc.) to figure your taxes, and don't use spreadsheets, you will likely find form 2210 painful.

If you use Quicken (or similar) to keep track of income and withholding during the year, and are comfortable with simple spreadsheet calculations, it might take an hour or two but be very doable.

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David Jay
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Re: Tax withholding for Roth Conversion

Post by David Jay » Thu Dec 06, 2018 7:05 pm

Are you paying the taxes out of taxable or out of the conversion?

If out of the conversion, my broker (Vanguard) will withhold state and federal in the percentages that I request. If out of taxable, I would make a quarterly payment for the 4th quarter.
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mhalley
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Re: Tax withholding for Roth Conversion

Post by mhalley » Thu Dec 06, 2018 7:11 pm

It is usually advisable to pay taxes from the taxable account so that money can work for you within the roth Ira. I would make the estimated tax payment. If you do not have the money in taxable to pay the conversion taxes, you might reconsider the conversion.
Tax software makes income tax filing a lot easier, I wouldn’t say it would become cumbersome and complicated to do the form. If it does turn out to be complicated and cumbersome, that is why they made cpas.

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