...Why wouldn’t everyone just do that!?
I think a lot of people just aren't aware of these other options. Or maybe they are aware, but don't mind overpaying in the first three quarters to cover a large 4th quarter conversion. Or maybe they don't mind filling out Form 2210. Or maybe they convert early in the year or throughout the year. Lots of different possible scenarios.
If anyone is interested, here's a
very informative thread that discusses the pros/cons of these methods. I'll attempt to summarize here...
Assume late-Dec Roth conversion of $100K, which drives $22K of additional tax liability. The taxes will be paid from non-retirement funds to maximize the conversion amount.
1. Do the $100K Roth conversion. Pay $22K tax from non-retirement funds on the Jan 15 estimated tax due date. This is very straightforward. But in many cases, will result in a penalty for under-withholding unless Form 2210 is used, which can be a major PITA for some people.
2. Do the $100K Roth conversion. Do a separate tIRA withdrawal for $22K with 100% withholding. Repay the $22K within 60 days and report it as a tax-free rollover on your return. The withholding is deemed to have been spread equally throughout the year, avoiding penalties and the need for Form 2210. However, a tax-free rollover can only be done once per year per individual. But a couple filing MFJ can alternate each year to get around the limitation.
3. Do the $100K Roth conversion. Withhold $22K during the conversion transaction. Net conversion amount is $78K. To complete the conversion, replace the $22K in the Roth within 60 days from non-retirement funds. This achieves all the same benefits as #2. Also, it is not subject to the once-per-year limitation since it is a conversion, not a rollover. However, if done late in the year, with the $22K replaced in Jan of the following year, the entire $100K is taxable in the first year, while the 5-year holding period is based on the year of contribution, which might require some careful record-keeping.
After studying the linked thread last year, I decided to use #2. In part, because I couldn't actually find anyone who has done #3. But tons of people do #2 and the process is well-documented. Also, the separate tIRA withdrawal is for our ENTIRE safe harbor liability for the year. Not just the tax associated with the late-Dec conversion. We have two pensions but no withholding, and we do no quarterlies. It also avoids the potential record-keeping issues associated with 5-year holding period being different from year of taxation. Also, DW and I both have large tIRA balances, so we can alternate each year for a very long time, which easily avoids the once-per-year limitation per individual.
Sorry for the long post. But I think this is one of the more interesting topics that I've learned about on this forum. So I thought I'd try to summarize what I've learned from multiple earlier threads and other sources.