Converting a 401K and when to file taxes for the conversion

[Charlie_Boy]

Nearing the second anniversary of my retirement and enjoying it immensely. I plan on converting a portion of my 401K to my Roth IRA while my tax rate is low, but am not sure of when to pay taxes. Do I need to submit a quarterly payment for the period that I convert or can I pay the taxes next year when I normally submit my forms? This is probably a question that has been addressed in the past, but I cannot find any mention of it. I do not normally file quarterly tax statements.

Charlie

 

[ziggy29]

Nearing the second anniversary of my retirement and enjoying it immensely. I plan on converting a portion of my 401K to my Roth IRA while my tax rate is low, but am not sure of when to pay taxes. Do I need to submit a quarterly payment for the period that I convert or can I pay the taxes next year when I normally submit my forms? This is probably a question that has been addressed in the past, but I cannot find any mention of it. I do not normally file quarterly tax statements.

First off, are you aware that if you perform a Roth conversion in 2010 you don't have to pay all the taxes in the 2010 tax year?

Unless it's advantageous for you to pay the entire tax in the 2010 tax year, you won't pay taxes for this conversion on your 2010 return, but rather as a "special deal" for 2010 conversions only, you can declare half of the conversion as 2011 income and the other half as 2012 income for tax purposes.

That might influence how you play it, but if you currently pay income taxes through withholding (since you said you don't currently file quarterly estimated payments), you may need to increase withholding amounts to reach the "safe harbor" level of withholding for 2011 which will avoid penalties for underwithholding.

 

[MasterBlaster]

To answer the OP's question directly, yes you pay taxes in the quarter in which the income/conversion is made. You'll need to estimate your quarterly taxes or extra quarterly taxes and then make a payment.

Having said that, the penalty for not paying in the correct quarter is (usually) waived if your income has jumped over last years income.

Either way though, you will need to pay the extra-conversion income taxes due.

 

[ziggy29]

Having said that, the penalty for not paying in the correct quarter is (usually) waived if your income has jumped over last years income.

Right -- that's the "safe harbor" I was referring to. Usually that means you've paid at least either 100% or 110% of your previous year's tax bill (100% for most, 110% for high AGIs) in withholding and estimated payments.

 

[Charlie_Boy]

Thank you for your responses. My only taxable income is a military retirement so I will have to file for that quarter.

 

[Independent]

I did a Trad IRA to Roth IRA conversion last year and didn't file quarterly tax estimates. I had the mutual fund withold taxes on the conversion. Wouldn't this work for a 401k?

 

[ziggy29]

I did a Trad IRA to Roth IRA conversion last year and didn't file quarterly tax estimates. I had the mutual fund withold taxes on the conversion. Wouldn't this work for a 401k?

It can work if you're at least 59.5 years old and can withdraw from an IRA without penalty. If you're under that age any withdrawal to pay taxes would subject to penalty and additional taxes.

Even if you are old enough to withdraw without penalty, the money you withdraw to pay the taxes will itself also be subject to taxes.