IRA to Roth IRA conversions

[scubamonkey]

Looks like future tax rates will be higher than they currently are now. I also don't like the idea of being at the mercy of the RMDs. So, my plan is to convert as much of my traditional IRAs to Roth as i can over the next several years.

I know this is a taxable event but I dont want to pay quarterly payments. Is it possible to pay a lump sum to the IRS for each conversion instead of the quarterly payments?

thx

 

[RunningBum]

If this is your only income, sure, you can pay the lump sum. If it's in the first quarter, that's all you need to do. If it's later, you may need to fill out form 2210 with your taxes, to show that you are paying taxes in the quarter that the taxable income was recognized.

More likely you have some other income, so you'll owe other taxes in other quarters as well. I find the EFPTS system for quarterly payments is so easy to set up and use that I don't give it another thought. I can set up payments for all 4 quarters, and change them very easily if needed. It's certainly easier than doing form 2210, IMO.

Worst case for you if you still want to avoid quarterly payments, you might have to pay a small penalty under form 2210 if your tax payments doesn't match up quarterly with your income.

 

[jazztbone]

Annualized estimated tax payments

You can use the annualized estimated tax method to pay your taxes as income is accrued, rather than in equal quarterly payments. Of course, the IRS doesn't make it simple. You have to do some math, via the worksheets in Publication 505. See the section "Instructions for the 2020 Annualized Estimated Tax Worksheet (Worksheet 2-7)" https://www.irs.gov/publications/p505#en_US_2019_publink1000194674

 

[Alan]

If this is your only income, sure, you can pay the lump sum. If it's in the first quarter, that's all you need to do. If it's later, you may need to fill out form 2210 with your taxes, to show that you are paying taxes in the quarter that the taxable income was recognized.

More likely you have some other income, so you'll owe other taxes in other quarters as well. I find the EFPTS system for quarterly payments is so easy to set up and use that I don't give it another thought. I can set up payments for all 4 quarters, and change them very easily if needed. It's certainly easier than doing form 2210, IMO.

Worst case for you if you still want to avoid quarterly payments, you might have to pay a small penalty under form 2210 if your tax payments doesn't match up quarterly with your income.

I certainly find the EFTPS system easy to use. In late December or early January I run my tax return through TurboTax to see exactly what tax I am due to pay and adjust the 4th quarterly payment accordingly. (Jan 15th is the date the 4th payment goes out).

 

[scubamonkey]

What is the EFPTS system?

 

[pb4uski]

Looks like future tax rates will be higher than they currently are now. I also don't like the idea of being at the mercy of the RMDs. So, my plan is to convert as much of my traditional IRAs to Roth as i can over the next several years.

I know this is a taxable event but I dont want to pay quarterly payments. Is it possible to pay a lump sum to the IRS for each conversion instead of the quarterly payments?

thx

If you're over 59 1/2, instead of quarterly payments you can just do a IRA withdrawal with 100% withholding in December for the taxes that you expect to owe (including the withdrawal for taxes of course).

For the purpose of underpayment penalties, the IRS considers withholdings as done evenly throughout the year irrespective of when they actually happen.

So for example, if your in the 22% tax bracket and expect to owe $10k in taxes, you would withdraw $12,821 and have it 100% withheld. The withdrawal increase your taxes by $2,821 ($12, 821* 22%)... which when added to $10k of taxed that you expected to owe is $12,821.

The only downside is that the money doesn't end up in the Roth, but it is out of the tIRA and therefore end up reducing RMDs.

 

[Sunset]

You can use the annualized estimated tax method to pay your taxes as income is accrued, rather than in equal quarterly payments. Of course, the IRS doesn't make it simple. You have to do some math, via the worksheets in Publication 505. See the section "Instructions for the 2020 Annualized Estimated Tax Worksheet (Worksheet 2-7)" https://www.irs.gov/publications/p505#en_US_2019_publink1000194674

I just pay 1.1 times the total tax for the previous year, then whatever my taxes are when I do my return I pay or get a refund.
There is no penalty as the 1.1 is a safe harbor rule.
Too much of a pain to try to calculate out the proper amount.

 

[Alan]

What is the EFPTS system?

Electronic Funds Transfer Payment System

Easy way to send payments to the IRS

https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system

 

[SecondCor521]

What is the EFPTS system?

https://lmgtfy.com/?q=What+is+the+EFPTS+system?

 

[Cobra9777]

I do a large Roth conversion each December. I pay the associated tax with my Jan 15 quarterly payment. When I file, I use Form 2210 to avoid penalties for under-withholding.

I prefer not to use the safe harbor rules, like 100% or 110% of prior year tax liability, because I would overpay in the first 3 quarters. Most of our income is in 4Q due to the large conversion. And in case I decide NOT to make a conversion, I avoid being significantly OVER-withheld.

I recently investigated doing a December IRA withdrawal with 100% withholding, as described by pb4uski. It's definitely an effective approach for people with drastically uneven income, like large conversions. But it also means using IRA funds instead of taxable funds to pay conversion tax. This negates one of the benefits of doing Roth conversions.

Since we still have tax-efficient access to taxable funds, I elected not to go that route for now. It's less convenient to do quarterly estimates and Form 2210. But it's a relatively small administrative trade-off to get maximum funds into the Roth, which is a more important objective.

 

[scubamonkey]

Thanks for all the responses. This gives me some options on how to handle this. My plan is to make the conversions each year when/if there is a large drop in the stock market. If there is no drop, then i make the conversion in December. If I make the conversions in December then I file the Form 2210 and pay the tax with the January payment. If i make the conversion sometime during the middle of the year, then there is a similar process by using the Form 2210. If I change my mind and just make the conversions at the beginning of each year, then I would use the estimated tax form and do quarterly payments through the EFPTS system.

 

[Sunset]

I use this to pay the IRS, as I just want to pay them and not schedule a payment far in advance.

I don't know which is better as I never used the other one, but this one works well.

https://www.irs.gov/payments/direct-pay

 

[SevenUp]

Thanks for all the responses. This gives me some options on how to handle this. My plan is to make the conversions each year when/if there is a large drop in the stock market. If there is no drop, then i make the conversion in December. If I make the conversions in December then I file the Form 2210 and pay the tax with the January payment. If i make the conversion sometime during the middle of the year, then there is a similar process by using the Form 2210. If I change my mind and just make the conversions at the beginning of each year, then I would use the estimated tax form and do quarterly payments through the EFPTS system.

This (more or less) works if the conversions are your only taxable income. Do you have significant other income?

You file form 2210 only together with form 1040, etc., when you do your normal tax return. Understanding how 2210 works, however, is a good thing.

 

[teejayevans]

So once you’re past 59.5 and the Roth was started more than 5 years ago, there’s no penalties or restrictions, for example I can make a conversion in March and a Roth withdrawal in June, then another conversion in July?

 

[pb4uski]

Yes.

 

[mrfeh]

It takes about 2 minutes to pay quarterly taxes online.

 

[JoeWras]

This transition to retirement has been tumultuous for estimated taxes.

We overpaid heavily last year. So, looking it the numbers, the overpayment should be more than enough to cover this year's tax. So, I applied the overpayment to this year.

That should be fine, right? It is essentially paid 1st quarter for the entire year. Do I have to file a 2210? I have quarterly income from investments and the 3rd quarter will get the bump from the IRA to Roth conversion.

 

[kaneohe]

This transition to retirement has been tumultuous for estimated taxes.

We overpaid heavily last year. So, looking it the numbers, the overpayment should be more than enough to cover this year's tax. So, I applied the overpayment to this year.

That should be fine, right? It is essentially paid 1st quarter for the entire year. Do I have to file a 2210? I have quarterly income from investments and the 3rd quarter will get the bump from the IRA to Roth conversion.

should be fine w/ no need for 2210...........estimated taxes are supposed to be paid quarterly in equal installments but if you pay faster nobody is going to complain.

 

[JoeWras]

should be fine w/ no need for 2210...........estimated taxes are supposed to be paid quarterly in equal installments but if you pay faster nobody is going to complain.

Thanks. Normally I don't do this. I pay quarterly and try to be close to the need.

The confusion is during the w*rking to retirement transition. This caused a big overpayment on our part last year. With low interest rates, it was just easy to "let it ride" this one time.

 

[pb4uski]

.... The confusion is during the w*rking to retirement transition. This caused a big overpayment on our part last year. With low interest rates, it was just easy to "let it ride" this one time.

You're not the first to do that, nor will you be the last.

 

[deserat]

I do a large Roth conversion each December. I pay the associated tax with my Jan 15 quarterly payment. When I file, I use Form 2210 to avoid penalties for under-withholding.

I prefer not to use the safe harbor rules, like 100% or 110% of prior year tax liability, because I would overpay in the first 3 quarters. Most of our income is in 4Q due to the large conversion. And in case I decide NOT to make a conversion, I avoid being significantly OVER-withheld.

I recently investigated doing a December IRA withdrawal with 100% withholding, as described by pb4uski. It's definitely an effective approach for people with drastically uneven income, like large conversions. But it also means using IRA funds instead of taxable funds to pay conversion tax. This negates one of the benefits of doing Roth conversions.

Since we still have tax-efficient access to taxable funds, I elected not to go that route for now. It's less convenient to do quarterly estimates and Form 2210. But it's a relatively small administrative trade-off to get maximum funds into the Roth, which is a more important objective.

I'm scratching my head a bit on this thread - I like your approach, however, why would you have to file the 2210? When I looked at it, the only thing I could come up with was you had to show the IRS that you did not have that conversion until the end of the year, therefore, you should not be penalized for under paying your taxes because you *did not have the income* until December and you paid the taxes on them on 15 Jan.

I have had a consulting business for over 12 years now and my income is quite variable (from low-mid 5 figures to lower six figures). I have heard people talk about safe harbor rules, however, how can I pay taxes and/or be penalized on income I haven't received/earned? I diligently have a cash slow sheet and pay my estimated taxes on the earnings I have received in that quarter. However, as with your situation, it may all be the end of the year. I have never filed a 2210 and have never been penalized.

So, my question is are you doing the 2210 to prove that you did not convert that IRS until the last quarter and as you paid the taxes in that quarter you should not be penalized for under-withholding? If that is the case, then I guess I will be doing that over several years as I get serious about conversions.

 

[DonBaldwin]

I'm confused about the statement that you must pay 110% of prior year taxes to qualify for the safe harbor.

According to Form 2210 instructions:

Who Must Pay the Underpayment Penalty
In general, you may owe the penalty for 2019 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:
1. 90% of your 2019 tax, or
2. 100% of your 2018 tax. Your 2018 tax return must cover a 12-month period.

 

[SevenUp]

I'm confused about the statement that you must pay 110% of prior year taxes to qualify for the safe harbor.

According to Form 2210 instructions:

Who Must Pay the Underpayment Penalty
In general, you may owe the penalty for 2019 if the total of your withholding and timely estimated tax payments didn't equal at least the smaller of:
1. 90% of your 2019 tax, or
2. 100% of your 2018 tax. Your 2018 tax return must cover a 12-month period.

Keep reading:

Higher income taxpayers. If your adjusted gross income (AGI) for 2018 was more than $150,000 ($75,000 if your 2018 filing status is married filing separately), substitute 110% for 100% in (2) above.

 

[Cobra9777]

I'm scratching my head a bit on this thread - I like your approach, however, why would you have to file the 2210? When I looked at it, the only thing I could come up with was you had to show the IRS that you did not have that conversion until the end of the year, therefore, you should not be penalized for under paying your taxes because you *did not have the income* until December and you paid the taxes on them on 15 Jan.

I have had a consulting business for over 12 years now and my income is quite variable (from low-mid 5 figures to lower six figures). I have heard people talk about safe harbor rules, however, how can I pay taxes and/or be penalized on income I haven't received/earned? I diligently have a cash slow sheet and pay my estimated taxes on the earnings I have received in that quarter. However, as with your situation, it may all be the end of the year. I have never filed a 2210 and have never been penalized.

So, my question is are you doing the 2210 to prove that you did not convert that IRS until the last quarter and as you paid the taxes in that quarter you should not be penalized for under-withholding? If that is the case, then I guess I will be doing that over several years as I get serious about conversions.

Tax returns are an annual document. The IRS assumes income is evenly earned and expects to see four equal estimated payments that meet one of the safe harbor rules. In my case, I typically make 3 very small estimated payments and then a giant one in Jan for the tax on my December conversion.

Inevitably, TurboTax says I owe a penalty for underwithholding in the first 3 quarters. It then offers Form 2210 as a potential way to eliminate or reduce the penalty, which is exactly what happens after I fill it out. So yes, it's just the mechanism for communicating the quarterly breakdown of income, deductions, etc, in order to show that tax payments were properly aligned with the timing of income.

 

[aja8888]

This is what I plan to do in December. I'm looking for advice as to how to handle the income tax payment.

Up until this tax year, I have made quarterly estimated tax payments. This year, with the option to not take my RMD pull (I am 76), I elected not to make quarterly tax payment since my trial tax return says I will owe NO TAX on my income this year (2020) without pulling the RMD.

This zero tax owed is due to having only income from SS (about $45K) and interest from MM & CDs ($10K). This income for seniors filing married jointly amounts to $0 tax owed when doing a trial return.

What I plan to do is convert, say $30k, to a Roth in December and that amount will have me owing income tax on about $20K of it. (I may convert more).

If I do the conversion in December, when will I have to pay the tax? And since I declined to pay estimated tax quarterly (even though I didn't owe any at that time), am I facing any penalty?