Estimated tax payment on Roth conversion

[audreyh1]

I don't find annualized income to be all that complicated. Most of my income is earned ratably throughout the year. Only cap gains and Roth conversions typically require special handling.

I did it for many years when I had large realized gains some years and others not. But even though I had the spreadsheets I found it a hassle, and keeping track of all the tax quarter numbers for filing form 2210. Even though I now receive most of my income in Dec and could get away with paying little estimated tax until the last estimated tax payment I’ve still found it a hassle. Now that my income varies little from year to year I’ve found the safe harbor based on prior year taxes much more convenient, so I only adjust the Q4 payment if it looks like I’ll exceed the 90% current year taxes owed safe harbor rule. I guess I like simply scheduling all the estimated tax payments in March/April, and then not dealing with tax calculations at all until Dec/Jan.

 

[audreyh1]

I just pay 110% of the previous total tax amount, spread over the 4 payment times. It's the safe harbor for income over $150K

It's easy, simple, and some years we owe more, others we get refund.

You can always adjust the Q4 estimated tax payment to avoid overpayment. In this case you won’t have to file form 2210 either since you met the prior taxes safe harbor rule for the first 3 payments.

 

[old medic]

I made a Roth conversion late December that should push us to the top of the 12% bracket. I'm wondering how and when to pay the fed tax on the conversion.

Thanks Ron..... now you got me worried....
I was thinking I would be fine just pay the extra filing my 25 return. Rough #s show owing an extra $1500, but now looking like I will need to send them some money NOW....

 

[Ronstar]

Thanks everyone!! Lots of great advice/ info!

Key points:

1. I had no idea that the IRS no longer took checks.

2. I had seen Safe Harbor mentioned in other places on ER.org, but never really understood it until you folks detailed it here.

3. Good points on how the Roth conversion in 2025 will increase 2025 tax and therefore increase the 2025 quarterlies to meet the 100 or 110% safe harbor - and that Roth conversions should continue going forward in order to substantiate the increase in quarterlies.

Our 2024 AGI was below $150k, and my 2025 tax year quarterlies exceed 100% of the 2024 tax. So I guess we're safe based on this measuring stick.

Given that the IRS doesn't take checks, and that I'm having a new CPA with an automated tax pmt system starting 4/15, and that I meet the 100% safe harbor, I think I'll just wait until 4/15 to settle up with the IRS.

And this thread brings to light that our income will go above the $150k limit for 2025 due to the conversion, so next year we better go with 110% on the quarterlies.

 

[JoeWras]

I like to explore complex topics. I even like some complex tax topics. But when it comes to estimated payments, I decided to keep life simple with safe harbor.

 

[audreyh1]

Thanks everyone!! Lots of great advice/ info!

Key points:

1. I had no idea that the IRS no longer took checks.

2. I had seen Safe Harbor mentioned in other places on ER.org, but never really understood it until you folks detailed it here.

3. Good points on how the Roth conversion in 2025 will increase 2025 tax and therefore increase the 2025 quarterlies to meet the 100 or 110% safe harbor - and that Roth conversions should continue going forward in order to substantiate the increase in quarterlies.

Our 2024 AGI was below $150k, and my 2025 tax year quarterlies exceed 100% of the 2024 tax. So I guess we're safe based on this measuring stick.

Given that the IRS doesn't take checks, and that I'm having a new CPA with an automated tax pmt system starting 4/15, and that I meet the 100% safe harbor, I think I'll just wait until 4/15 to settle up with the IRS.

And this thread brings to light that our income will go above the $150k limit for 2025 due to the conversion, so next year we better go with 110% on the quarterlies.

Just to be clear, apparently the IRS is still accepting checks for tax payments until some time in 2027. Sorry for that confusion. But you’ll have to switch to a form of electronic payments before too long anyway. Apparently telephone will also be an option.

Yes, for your 2026 estimated tax payments, so this year starting by April 15, you’ll have to use 110% 2025 taxes divided by 4 to meet safe harbor due to your 2025 AGI exceeding $150K. Your accountant should compute the amounts for you as well as the due dates which are generally April 15, June 15, September 15 and January 15.

Yes, you should be covered by safe harbor for 2025 assuming your final estimated tax payment due January 15 completes the 100% safe harbor from 2024 taxes, or meets 90% of your 2025 tax liability whichever is lower. But if an accountant is computing your 2025 taxes owed you likely won’t know that in time. Sounds like you already paid that final quarterly amount?

 

[Jerry1]

Yes, you should be covered by safe harbor for 2025 assuming your final estimated tax payment due January 15 completes the 100% safe harbor from 2024 taxes, or meets 90% of your 2025 tax liability whichever is lower. But if an accountant is computing your 2025 taxes owed you likely won’t know that in time. Sounds like you already paid that final quarterly amount?

Re 100% vs 90% of your 2025 liability. It won’t matter for Ronstar because he’s paying estimates based on the 100% of 2024. Given the new for 2025 Roth conversion, it’s unlikely the 90% will come into play and either way, he’s covered. The 90% rule would only benefit him if his 2025 income was lower than 2024 and he wanted to reduce his estimated payments accordingly.

 

[sengsational]

Usually mentioned in these threads is doing a 401k or tIRA withdrawal with 100% withholding. That is counted as getting paid evenly throughout the year.

 

[Montecfo]

Agree that the safe harbors based on prior year tax are easier! And they work well when you are doing Roth conversions.

 

[Ronstar]

Just to be clear, apparently the IRS is still accepting checks for tax payments until some time in 2027. Sorry for that confusion. But you’ll have to switch to a form of electronic payments before too long anyway. Apparently telephone will also be an option.

Yes, for your 2026 estimated tax payments, so this year starting by April 15, you’ll have to use 110% 2025 taxes divided by 4 to meet safe harbor due to your 2025 AGI exceeding $150K. Your accountant should compute the amounts for you as well as the due dates which are generally April 15, June 15, September 15 and January 15.

Yes, you should be covered by safe harbor for 2025 assuming your final estimated tax payment due January 15 completes the 100% safe harbor from 2024 taxes, or meets 90% of your 2025 tax liability whichever is lower. But if an accountant is computing your 2025 taxes owed you likely won’t know that in time. Sounds like you already paid that final quarterly amount?

Re 100% vs 90% of your 2025 liability. It won’t matter for Ronstar because he’s paying estimates based on the 100% of 2024. Given the new for 2025 Roth conversion, it’s unlikely the 90% will come into play and either way, he’s covered. The 90% rule would only benefit him if his 2025 income was lower than 2024 and he wanted to reduce his estimated payments accordingly.

No I haven’t paid the final estimated payment yet. My Jan 15 estimated payment is set up automated through the old accountant. After it goes in, our total paid 2025 estimated taxes will be about $100 over our 2024 tax.

I was going to start doing our own tax returns again, but DW is more comfortable with a cpa. And we switched to a cpa that DW’s friend uses, who we’ve met and are comfortable with.

 

[audreyh1]

Usually mentioned in these threads is doing a 401k or tIRA withdrawal with 100% withholding. That is counted as getting paid evenly throughout the year.

That also add to your AGI and taxable income for the year which can be a major consideration for those wishing to stay under a particular amount, plus incurs a 10% penalty for those under 59 1/2.

If someone is doing Roth conversions they probably don’t want to send more to the IRS instead. It’s generally better to pay taxes on Roth conversions out of non-IRA funds if you have them in order to maximize the amount sent to the Roth.

Once you are subject to forced withdrawals due to RMDs it makes a lot more sense.

 

[engineernerd]

That also add to your AGI and taxable income for the year which can be a major consideration for those wishing to stay under a particular amount, plus incurs a 10% penalty for those under 59 1/2.

If someone is doing Roth conversions they probably don’t want to send more to the IRS instead. It’s generally better to pay taxes on Roth conversions out of non-IRA funds if you have them in order to maximize the amount sent to the Roth.

Once you are subject to forced withdrawals due to RMDs it makes a lot more sense.

But if you do take a distribution solely to get your taxes withheld (i.e. you don't need the money to live on), and you have enough in taxable to cover the taxes, you can play the 60-day rollover game once every 366 days.

Series of operations:

(1) Figure the amount of taxes you want withheld.

(2) By the end of December, take a sufficient-sized distribution from a tIRA and request the amount from step 1 be withheld.

(3) No less than 60 days later, call your tIRA custodian to arrange the exact same amount of the distribution be transferred into your tIRA from your brokerage account or bank account, asking them to characterize it as a rollover, NOT a contribution.

End result, your desired amount withheld and your tIRA balance unaffected except by whatever investment returns you sat out during that time. If this worries you, do step (3) just a day or two after step (2).

I guess there's a sort-of optional step (4) when you do your taxes: you should write "$Xk rollover" on Line 4b to explain the difference between the IRA distributions and the taxable share.

ADDED DETAIL: you don't have to roll the distribution over into the same account you took it out of, if you have more than one tIRA account or you took it from a 401(k) and would prefer to add it to a rollover IRA.

 

[engineernerd]

As someone who has not yet dealt with quarterly estimated tax payments, I have questions.

It seems you can get in trouble if any of the payments underrepresents the share of tax triggered by your YTD income. So if your safe harbor is 100% of your 2024 tax, and in 2024 your quarterly payments calculated according to the timing of your 2024 income should have been, say, $5,000 Q1, $4,000 Q2, and $1,000 Q3 and Q4, would you need to replicate that series of payments in 2025? IOW, would you be subject to a penalty if you arranged four equal quarterly payments in 2025? If you handled 2024’s taxes via withholding, would you need to back-calculate the correct quarterly payments for 2024 to take advantage of that safe harbor rule? TIA.

 

[old medic]

Dinkytown says I am $1300 behind... got 2 days to get thru the ID Me BS....

 

[fosterscik]

Just divide your 2024 $5,000 by 4, and pay $1,250 each quarter in 2025. No retroactive changes needed.

 

[audreyh1]

But if you do take a distribution solely to get your taxes withheld (i.e. you don't need the money to live on), and you have enough in taxable to cover the taxes, you can play the 60-day rollover game once every 366 days.

Series of operations:

(1) Figure the amount of taxes you want withheld.

(2) By the end of December, take a sufficient-sized distribution from a tIRA and request the amount from step 1 be withheld.

(3) No less than 60 days later, call your tIRA custodian to arrange the exact same amount of the distribution be transferred into your tIRA from your brokerage account or bank account, asking them to characterize it as a rollover, NOT a contribution.

End result, your desired amount withheld and your tIRA balance unaffected except by whatever investment returns you sat out during that time. If this worries you, do step (3) just a day or two after step (2).

I guess there's a sort-of optional step (4) when you do your taxes: you should write "$Xk rollover" on Line 4b to explain the difference between the IRA distributions and the taxable share.

ADDED DETAIL: you don't have to roll the distribution over into the same account you took it out of, if you have more than one tIRA account or you took it from a 401(k) and would prefer to add it to a rollover IRA.

True - yet another complication that has a frequency rule of no more than once during a 12 month period. Your tIRA balance could be affected if you sold an asset to cover the withheld taxes. And you ultimately have to pay taxes from after tax funds anyway. So maybe if you didn’t have the cash but could get it within 60 days, or rolling over in a new tax year made a difference, it might make sense.

 

[audreyh1]

As someone who has not yet dealt with quarterly estimated tax payments, I have questions.

It seems you can get in trouble if any of the payments underrepresents the share of tax triggered by your YTD income. So if your safe harbor is 100% of your 2024 tax, and in 2024 your quarterly payments calculated according to the timing of your 2024 income should have been, say, $5,000 Q1, $4,000 Q2, and $1,000 Q3 and Q4, would you need to replicate that series of payments in 2025? IOW, would you be subject to a penalty if you arranged four equal quarterly payments in 2025? If you handled 2024’s taxes via withholding, would you need to back-calculate the correct quarterly payments for 2024 to take advantage of that safe harbor rule? TIA.

No replicating the following year, each tax year starts fresh.

Four equal payments based on prior year’s tax paid divided by 4 is safe.

 

[engineernerd]

No replicating the following year, each tax year starts fresh.

Four equal payments based on prior year’s tax paid divided by 4 is safe.

True even if in 2025 you have a similar front-loaded income pattern?

 

[audreyh1]

True even if in 2025 you have a similar front-loaded income pattern?

Yes. If you do the 4 equal payments for 2025 based on 2024 taxes paid, income timing doesn’t matter at all. If your income in 2025 is considerably higher in 2025 compared to 2024 you are also safe.

 

[Trooper]

I had not heard EFTPS was going away.

Same here, except for this great forum. You would think there would be an announcement on the EFTPS site, but nothing when I paid my Q4 estimated taxes today.

I put a reminder on my calendar to switch over to IRS.gov in April.

 

[audreyh1]

I believe EFTPS is going away for individuals some time this year - or at least that was a plan announced last year. We plan to pay our final 2025 taxes via EFTPS, but then switch to our irs.gov account to schedule 2026 estimated taxes.

 

[old medic]

I put a reminder on my calendar to switch over to IRS.gov in April.

I would work on the ID Me account if you dont have one.... Took me several tries, and DW ended up having to go to the local post office for them to a prove her ID.

 

[Trooper]

I would work on the ID Me account if you dont have one.... Took me several tries, and DW ended up having to go to the local post office for them to a prove her ID.

Thanks. I have an id.me account and an irs.gov account already. The former was needed for SSA.

 

[Sunset]

You can always adjust the Q4 estimated tax payment to avoid overpayment. In this case you won’t have to file form 2210 either since you met the prior taxes safe harbor rule for the first 3 payments.

Thanks... I never thought about it, but you are right this would work pretty easily as by then I know our income.

 

[Sunset]

Our previously scheduled estimated tax payment went through EFTPS today.

Annoying that just as I got used to using it, and setting it for all 4 estimated taxes at one time, it goes away.

Will use irs.gov going forward.