Roth Conversion Tax Reporting / Payment Question

[Austin704]

Hi All,

I am contemplating converting a rollover tIRA at Schwab into a Roth starting in 2020. My question concerns the tax payment. I understand some on the forum send in estimated tax payments to the IRS using form 1040ES when they make conversions.

I plan to take the tax payment from a taxable account. Do I just send in form 1040ES and estimated tax whenever I make a conversion? Is there a preferred way to time the conversions? I’m thinking quarterly conversions in the last month of each quarter and making tax payments along the way.

Thanks!

 

[bingybear]

Hi All,

I am contemplating converting a rollover tIRA at Schwab into a Roth starting in 2020. My question concerns the tax payment. I understand some on the forum send in estimated tax payments to the IRS pursuant to form 1040ES when they make conversions.

Schwab tells me they will withhold and send to the IRS on my behalf the amount of tax that I specify on the account (currently set at 20%) when I do a conversion. My marginal tax bracket is 24%.

If I were to do 4 quarterly conversions each year and had Schwab withhold taxes at my marginal tax rate would I be required to report anything to the IRS or would this take care of it?

Thanks!

not sure what you are looking for?

you will get a 1099-R from schwab

you will need to file you taxes that would contain your 1099-r info and payment withheld to the IRS plus other tax information for other tax events. So, no I don't think you get away with not having to report it to the government.

The bigger issue for me would be that the withheld money paying the tax would likely come from your TIRA and thus you would not only pay tax on the conversion, but be taxed on your tax payment. I usually pay taxes out of my after tax (taxable) account.

 

[Austin704]

not sure what you are looking for?



you will get a 1099-R from schwab



you will need to file you taxes that would contain your 1099-r info and payment withheld to the IRS plus other tax information for other tax events. So, no I don't think you get away with not having to report it to the government.



The bigger issue for me would be that the withheld money paying the tax would likely come from your TIRA and thus you would not only pay tax on the conversion, but be taxed on your tax payment. I usually pay taxes out of my after tax (taxable) account.

Thanks. I completely forgot that if Schwab withholds it will come from the tax-deferred. That’s not what I want. So, if I want to pay the tax from a taxable account I need to pay it myself and send in estimated payments using for 1040ES to avoid a penalty Is that correct?

Any thoughts on the timing of conversions from a tax perspective? 4 quarterly versus 1 annual, for example?

 

[Austin704]

I clarified my original question to remove the bit about Schwab withholding the tax. Not what I intended... I want to pay from taxable. Sorry for the confusion!

 

[bingybear]

I don't use the estimated tax forms. I use one of the IRS electronic methods. Also, don't forget to pay your state too if that is required in your case

 

[Midpack]

I don't use the estimated tax forms. I use one of the IRS electronic methods. Also, don't forget to pay your state too if that is required in your case

My first year doing Roth conversions so I’m no expert. But I made sure Vanguard will not withhold from my TIRA distribution>Roth account so I can pay (estimated) taxes from taxable cash on hand. I’m doing the conversion and paying estimated Federal and state taxes in one shot this quarter and not expecting a problem, worst case I’ll have to do a Form 2210 as the conversion is larger than all other income for the year.

Next year I may include one quarter of the planned conversion distribution taxes due in each of the four estimated tax payments, but I’m not sure there’s any advantage, so I may do it all fourth quarter next year and beyond as well. My 2019 return will be my test case for one big est tax payment.

I’ve also begun to use EFTPS and the state equivalent for estimated taxes. I should’ve quit mailing in 1040ES’s years ago.

 

[Alan]

I have done quite a few conversions now, including while here in England.

I use EFTPS to make my estimated tax payments online using money from my taxable accounts.

https://www.eftps.gov/eftps/

 

[bingybear]

I've used direct pay

 

[Austin704]

My first year doing Roth conversions so I’m no expert. But I made sure Vanguard will not withhold from my TIRA distribution>Roth account so I can pay (estimated) taxes from taxable cash on hand. I’m doing the conversion and paying estimated Federal and state taxes in one shot this quarter and not expecting a problem, worst case I’ll have to do a Form 2210 as the conversion is larger than all other income for the year.

Next year I may include one quarter of the planned conversion distribution taxes due in each of the four estimated tax payments, but I’m not sure there’s any advantage, so I may do it all fourth quarter next year and beyond as well. My 2019 return will be my test case for one big est tax payment.

I’ve also begun to use EFTPS and the state equivalent for estimated taxes. I should’ve quit mailing in 1040ES’s years ago.

This is helpful. I’ll be interested to know how it works out for you. My preference would be once a year 4th quarter conversion too. Just wasn’t sure if the IRS expects more “prepayment” than that throughout the year. I’ll definitely used the E portal to avoid paperwork. Thanks!

 

[bingybear]

My first year doing Roth conversions so I’m no expert. But I made sure Vanguard will not withhold from my TIRA distribution>Roth account so I can pay (estimated) taxes from taxable cash on hand. I’m doing the conversion and paying estimated Federal and state taxes in one shot this quarter and not expecting a problem, worst case I’ll have to do a Form 2210 as the conversion is larger than all other income for the year.

Next year I may include one quarter of the planned conversion distribution taxes due in each of the four estimated tax payments, but I’m not sure there’s any advantage, so I may do it all fourth quarter next year and beyond as well. My 2019 return will be my test case for one big est tax payment.

I’ve also begun to use EFTPS and the state equivalent for estimated taxes. I should’ve quit mailing in 1040ES’s years ago.

I thought you may still get a small penalty since you did not pay earlier of through the year.

one other option I think would work is to have the withholding taken from the TIRA and then pay it back with after tax $ within the 60 days. Should be able to do this at the end of year as the withholding should make it as if the payment was throughout the year.

 

[Animorph]

I have a target amount to convert each year, so I pretty much know what my taxes will be. I use EFTPS to pay the usual quarterly estimated taxes in four equal payments. I do the Roth conversions whenever I feel like it. Last year was one big conversion as early as possible, since I was expecting stocks to increase in price during the year. Prior to that I used to over-convert and recharacterize as needed, which is no longer allowed. For 2020 I think I may convert monthly or at the end of the year, expecting either a flat or down market.

The equal quarterly payments, accounting for all the safe harbor requirements, makes it easier to do your taxes. If your payments aren't equal the IRS will want you to show your income and tax payments by quarter, which for me at least is a PITA. That said, penalties and interest have seemed pretty low and maybe paying them would be easier for you.

 

[kaneohe]

.........................

one other option I think would work is to have the withholding taken from the TIRA and then pay it back with after tax $ within the 60 days. Should be able to do this at the end of year as the withholding should make it as if the payment was throughout the year.

Just be careful doing this esp in consecutive yrs. You are only allowed 1 rollover in 365 days....not per yr.........so if you're a day early, the rollover becomes a distribution instead.

 

[Sunset]

OP - if you pay 4 quarterly payments to bring your total tax paid in 2020 (incl withheld taxes) little more than 110% of 2019 total tax bill, there is no penalty even if the final tax bill is much larger.
It's called safe harbor.
Read about it rather than taking my word for it.

 

[Austin704]

OP - if you pay 4 quarterly payments to bring your total tax paid in 2020 (incl withheld taxes) little more than 110% of 2019 total tax bill, there is no penalty even if the final tax bill is much larger.
It's called safe harbor.
Read about it rather than taking my word for it.

Thank you. I’ve got some homework to do.

 

[kaneohe]

OP - if you pay 4 quarterly payments to bring your total tax paid in 2020 (incl withheld taxes) little more than 110% of 2019 total tax bill, there is no penalty even if the final tax bill is much larger.
It's called safe harbor.
Read about it rather than taking my word for it.

This is true provided you pay 4 equal quarterly payments. If you don't , IRS assumes your income came evenly during the yr and expects similar payments.
You have to prove income and tax payments were matched timing-wise w/ F2210 Sch AI if your payments are not equal.

 

[Midpack]

This is true provided you pay 4 equal quarterly payments. If you don't , IRS assumes your income came evenly during the yr and expects similar payments.
You have to prove income and tax payments were matched timing-wise w/ F2210 Sch AI if your payments are not equal.

I've had to do the Form 2210 several times, first time without prior knowledge prompted by TT, and it's not that big a deal if you have any decent records. Even easier with TT.

I suppose it's possible, but I've never had a form 2210 questioned.

It should go without saying but I am not advocating arbitrarily delaying estimated payments until year end. Quarterly estimated payments need to reasonably match the same quarters income. That is how I've paid estimated taxes, especially once retired, for many years - I have never paid four equal estimated payments.

If you don't keep good accessible records, you may wish you'd paid roughly equal quarterly payments...

 

[Austin704]

I have done quite a few conversions now, including while here in England.

I use EFTPS to make my estimated tax payments online using money from my taxable accounts.

https://www.eftps.gov/eftps/

Thanks for the link.

 

[Sunset]

I will point out some other possible actions just for fun:

In making a quarterly payment, rather than make 4 equal payments at the correct time, a person could pay 110% of previous year total tax in the first quarter and be in the safe harbor, skipping the other 3 payments.

A great alternative another forum user does; if you have a lot of IRA money is to take out the 100% of tax due at the end of the year and have the brokerage/bank that holds the IRA deem all of it as tax payment. Because it's withheld tax it's considered evenly paid though-out the year.

 

[UpAnchor]

A great alternative another forum user does; if you have a lot of IRA money is to take out the 100% of tax due at the end of the year and have the brokerage/bank that holds the IRA deem all of it as tax payment. Because it's withheld tax it's considered evenly paid though-out the year.

Yes, several of us do that and avoid having to file estimated taxes. Easy enough for federal withholding, may not be so easy with state depending on where one lives and whether their brokerage will perform state withholding (don’t know about Schwab.) One of the reasons I keep some IRA money at Fidelity is because they will withhold MN state taxes for me whereas Vanguard will not.

 

[RetireBy90]

f I were to do 4 quarterly conversions each year and had Schwab withhold taxes at my marginal tax rate would I be required to report anything to the IRS or would this take care of it?

Next year I may include one quarter of the planned conversion distribution taxes due in each of the four estimated tax payments, but I’m not sure there’s any advantage, so I may do it all fourth quarter next year and beyond as well. My 2019 return will be my test case for one big est tax payment.

Just thinking here...
I'm also starting Roth conversions this year and I'm thinking that 4 quarterly conversions would be like dollar cost averaging. This way if market is down, I can convert more assets (or more shares) and when market is up less shares.
Hrmmmm

 

[Gotadimple]

To only reason to file a form 2210 is if your taxable earnings aren't equal throughout the year and so your withholding isn't level throughout the year. The IRS expects you will pay your taxes as you earn income. The 2210 gets you through the gyrations to prove to the IRS that it was being paid as you earned the income.

Don't do it if you don't have to. Form 2210 are a lot of work IMO. If you have a steady stream of income (i.e., social security, pensions, annuities, or a timed withdrawal system) where taxes are withheld, or you set up EFTPS payments, the IRS is happy.

 

[Doribe]

This is helpful. I’ll be interested to know how it works out for you. My preference would be once a year 4th quarter conversion too. Just wasn’t sure if the IRS expects more “prepayment” than that throughout the year. I’ll definitely used the E portal to avoid paperwork. Thanks!

I send in an estimate in the quarter that I do the rollover. This is what is sounds like that want. I am afraid I would get hit with a penalty if I just sent in an estimate in the 4th Quarter.

In 2020 my rollover amounts will be less so I will probably have the tax payment taken out of my pension check smoothed over the year.

 

[Austin704]

I was thinking I’d actually do the conversion in the 4th quarter and send the estimated tax payment at the same time, so that my payment and the spike in income occur together, which seems to be the overriding goal of these IRS rules.

 

[bingybear]

I was thinking I’d actually do the conversion in the 4th quarter and send the estimated tax payment at the same time, so that my payment and the spike in income occur together, which seems to be the overriding goal of these IRS rules.

have you walked thru Form 2210 ?

there is a significant difference if you pay in December as an estimate or have it withheld at the same time.

but the penalty may not be all that bad.

 

[Austin704]

have you walked thru Form 2210 ?



there is a significant difference if you pay in December as an estimate or have it withheld at the same time.



but the penalty may not be all that bad.

No, I haven’t but I will. I’d rather not pay a penalty. I’ve heard different things from different people regarding the timing of the conversion vs. the timing of estimated tax payments on that conversion. My impression is that the IRS wants income and related tax payments to be reasonably close in time. I just assumed that if my conversion occurs in Q4 (let’s say October) and I make the tax payment at the same time, I’m good. To be on the safe side, though, I’m starting to believe I’d be better off making quarterly conversions and payments.

Just FYI my current thinking is to convert $50,000 per year. I could pay the estimated taxes quarterly and just do the conversion whenever I’m ready. Form 1040ES says the last estimated tax payment isn’t due until January 15 of the following year, so that would seem to work. Is this approach flawed? Does the IRS care when I convert if they’re getting 4 equal tax payments during the year?