Planning 2019 IRA conversion to Roth (age 58)

[IMATERP]

This has probably been addressed in a previous thread, but I am trying to verify a couple of specificities.

I am 58 years old and am planning to make a 30k Transfer from tIRA to my Roth IRA in August 2019. The transfer would bring wife and I to the 78k taxable income ceiling (12% rate.)

1. Since I am not 59 1/2, do I need to pay a 10% penalty as if I were taking a distribution then making a transfer OR just treat the transfer as taxable income?

2. Let’s say I am making this transfer in August 2019 (and the taxes owed would be approximately 2k.). Do I need to make quarterly estimated payments throughout the year OR can I make a one time estimated payment during the quarter that I make the conversion?

Just making sure all ducks are in line prior to implementing this years strategy. Thanks bunches for your help.

I

 

[pb4uski]

1. No, the penalty does not apply to Roth conversions since you're moving money from one penalty restricted retirement account to another penalty restricted retirement account. The amount converted will be pension income on your 2019 Form 1040.

2. You can make an estimated payment for the taxes owed in September... you may need to file a Form 2210 with your 2019 return and use the annuallized income installment method to avoid an underpayment penalty.

 

[RunningBum]

1. No penalty. You'll get a 1099-R with appropriate codes and boxes checked that will indicate it is taxable income but no penalty. I think it might be called an allowed early withdrawal, or something like that.

2. This is the part that it is a little tricky. You certainly can make the tax payment in the quarter you make the conversion, but you might need to fill out form 2210 to show they matched. Or you could make even quarterly estimated payments, but if things change and you decide not to do the conversion, or convert more, you will be off. I've done both, and no had any problems. Some people hate dealing with form 2210, but I didn't think it was that bad. It's easier now if you aren't itemizing deductions, because you have to assign all income and all deductions to the quarter they were realized in.

 

[audreyh1]

I think the dislike of 2210 AI comes from having to report income received during the year in detail. This generally has to come from your own records. I keep careful records, and Quicken generates me my YTD Total Income custom report. Yet I still have to go back at tax time and update those quarterly numbers to fill out 2210AI because lots of details aren’t available until the 1099 is issued. So during the year I pad my estimated taxes knowing that the numbers aren’t final.

BTW if you meet the tax penalty safe harbor based on paying last year’s taxes(or last year’s taxes times 1.1 for higher income) in four equal installments you don’t need to worry about additional taxes due to the Roth conversion until April 15, 2020.

 

[pb4uski]

Agree that the 2210 AI is a bit of a pain, but it is pretty easy for me to look up how much was earned each quarter to date.... the thing that makes it a bit harder is that the end periods are not true quarters but are the month ends preceeding the quarterly payment dates of 4/15, 6/15, 9/15 and 1/15.... so YTD taxable income for 3/31, 5/31, 8/31, 12/31.

It would be so much easier if they made the estimated payment dates 4/15, 7/15. 10/15 and 1/15 and had the YTD taxable income dates be 3/31, 6/30, 9/30 and 12/31.

 

[IMATERP]

Thanks everyone for the feedback. I just glanced at the rules regarding Form 2210 and that is something which may be a bit difficult to calculate (as it would be an annoyance to start asking wife for quarterly payroll info.). Also, since this is my first year that I am not receiving a regular salary, we would never meet the threshold of withholding as much as we did in 2018.

With the aforementioned in mind, would I need to still complete Form 2210 if I just submitted an estimated $500 per quarter beginning in April 2019 ? Granted, I would still withhold enough that I am certain we wouldn’t owe at the end of the year.

By the way, at first glance, Form 2210 is a Pain In The A** and I’d like to handle the taxes on my conversion in a simpler way.

 

[kaneohe]

Paying the estimated taxes in equal quarterly payments is definitely the easier thing to do.....and no F2210. On the other hand, no one should leave this earth w/o doing
F2210SchAI at least once so that you can judge for yourself whether the first statement is true

As Audrey mentioned above, if you can meet the safe harbor
of 100% (or 110% if AGI>150K) by withholding of previous yr taxes , you won't have to worry about estimated taxes......so consider withholding more if you can.

 

[pb4uski]

Thanks everyone for the feedback. I just glanced at the rules regarding Form 2210 and that is something which may be a bit difficult to calculate (as it would be an annoyance to start asking wife for quarterly payroll info.). Also, since this is my first year that I am not receiving a regular salary, we would never meet the threshold of withholding as much as we did in 2018.

With the aforementioned in mind, would I need to still complete Form 2210 if I just submitted an estimated $500 per quarter beginning in April 2019 ? Granted, I would still withhold enough that I am certain we wouldn’t owe at the end of the year.

By the way, at first glance, Form 2210 is a Pain In The A** and I’d like to handle the taxes on my conversion in a simpler way.

Yes... if you expect to owe $2,000 and pay $500/qtr you will be fine.

Once you are 59 1/2 you could do a $2020 tIRA withdrawal and have 99% of it withheld... the IRS views withholdings as paid throughout the year even if the withholding is in December... a lot of us use this approach in lieu of paying estimated taxes.... the $2020 would be income though so if one is managing income for ACA subsidies or to the top of a particular tax bracket you need to factor that into your planning.

For your wife, all you would need is her paystubs for the last pay period prior to 3/31, 5/31, 8/31 and 12/31.

 

[IMATERP]

Once you are 59 1/2 you could do a $2020 tIRA withdrawal and have 99% of it withheld... the IRS views withholdings as paid throughout the year even if the withholding is in December... a lot of us use this approach in lieu of paying estimated taxes.... the $2020 would be income though so if one is managing income for ACA subsidies or to the top of a particular tax bracket you need to factor that into your planning.

I don’t quite understand the above Statement. Are you saying that - next year (2020) when I reach 59 1/2, I can complete the same tIRA to Roth and send an estimated tax payment (say $2000) in December 2020.

If not, please clarify.

I

 

[kaneohe]

I don’t quite understand the above Statement. Are you saying that - next year (2020) when I reach 59 1/2, I can complete the same tIRA to Roth and send an estimated tax payment (say $2000) in December 2020.

If not, please clarify.

I

No, he is saying you can take a withdrawal from TIRA and withhold most of it for the taxes. Withholding , no matter when you take it, is treated as being taken evenly during the yr. In contrast, paying estimated taxes is treated as being paid when received so you could get a late penalty paying estimated taxes but much less likely if you withhold. 2 different animals............

 

[pb4uski]

No, he is saying you can take a withdrawal from TIRA and withhold most of it for the taxes. Withholding , no matter when you take it, is treated as being taken evenly during the yr. In contrast, paying estimated taxes is treated as being paid when received so you could get a late penalty paying estimated taxes but much less likely if you withhold. 2 different animals............

^^^^^ This. If you do a $2,020 withdrawal and 99% is withheld ( that is the most Vanguard will do) the $2,000 is withheld and sent to the IRS and you get the remaining $20.

 

[audreyh1]

Agree that the 2210 AI is a bit of a pain, but it is pretty easy for me to look up how much was earned each quarter to date.... the thing that makes it a bit harder is that the end periods are not true quarters but are the month ends preceeding the quarterly payment dates of 4/15, 6/15, 9/15 and 1/15.... so YTD taxable income for 3/31, 5/31, 8/31, 12/31.

It would be so much easier if they made the estimated payment dates 4/15, 7/15. 10/15 and 1/15 and had the YTD taxable income dates be 3/31, 6/30, 9/30 and 12/31.

I don’t mind it so much because larger my income is quarterly, so the 5/31 date misses the larger June income. I don’t have to pay taxes on that until September. And the remaining two quarters end income taxes not due until 1/15 of the following year.

 

[RunningBum]

I don’t mind it so much because larger my income is quarterly, so the 5/31 date misses the larger June income. I don’t have to pay taxes on that until September. And the remaining two quarters end income taxes not due until 1/15 of the following year.

I never looked at it that way. I usually plan even quarterly estimated payments unless I decide to change income strategy, which would usually be late in the year, but it's good to see how this would favor me too.