IRA to Roth IRA conversions

[Cobra9777]

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?

I think you'll be fine paying the tax on Jan 15, 2021, with no penalty. Although I'm not sure what happens with ZERO withholding in 1Q-3Q. Might be a small penalty because you DID have income in those quarters.

If you want to be sure, just run your 2020 trial tax return through 2019 TurboTax. At first, it will likely say you owe a penalty due to underwithholding. But go through the Form 2210 process and see what it says. My guess is that you'll either owe no penalty or some very nominal amount. Just keep in mind it's all based on 2019 brackets, deductions, etc... the answer could change a bit when you run it for real through 2020 TurboTax.

 

[SevenUp]

I think you'll be fine paying the tax on Jan 15, 2021, with no penalty. Although I'm not sure what happens with ZERO withholding in 1Q-3Q. Might be a small penalty because you DID have income in those quarters.

If you want to be sure, just run your 2020 trial tax return through 2019 TurboTax. At first, it will likely say you owe a penalty due to underwithholding. But go through the Form 2210 process and see what it says. My guess is that you'll either owe no penalty or some very nominal amount. Just keep in mind it's all based on 2019 brackets, deductions, etc... the answer could change a bit when you run it for real through 2020 TurboTax.

+1 to the trial return idea.

As long as the 1Q-3Q income was low enough that no tax liability was incurred, there is no penalty for not withholding or paying estimated tax in those quarters.

It does take a little work to gather the information needed for Schedule AI on Form 2210, but that's the price of admission to have the penalty waived.

 

[aja8888]

+1 to the trial return idea.

As long as the 1Q-3Q income was low enough that no tax liability was incurred, there is no penalty for not withholding or paying estimated tax in those quarters.

It does take a little work to gather the information needed for Schedule AI on Form 2210, but that's the price of admission to have the penalty waived.

Will do the return and 2210 form. Thanks.

 

[pb4uski]

+1 Since based on your income through Aug 31, annualized you would have no income tax due, you can pay the tax arising from the Roth conversion on or before January 15 and should not be subject to any penalty. You might have to file a Form 2210 AI to prove that what you owed didn't arise until after Aug 31.

 

[gcgang]

I’m thinking of doing the same, looking at maxing 22% bracket. At current interest rates I might as well pay the taxes to government ASAP. An additional “tax” will be Medicare surcharge of about 3% of amount I’d be converting. Gotta believe brackets won’t be so friendly in the future.

 

[deserat]

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.

Thank you - I don't use Turbo-tax - I do all my taxes manually, hence my looking at the form and seeing it shows when the income was realized. As I said above, it is difficult to pay taxes on money you didn't earn. Moreover, you could decide that you won't convert any that year or, as many times in my case, the income that is earned is quite variable and time dependent. It looks like the 2210 allows you to prove that to the IRS so you don't get dinged because they look at it annually versus quarterly (sort of - one could ask why they expect you to pay quarterly when they base their penalty on annually - sigh - the gubmint at work). He!!, I think they have access to all of my accounts anyhow - anything over $10K transferred between accounts gets reported, so they can check on their own....

I will become comfortable with filling out the 2210

 

[pc95]

I’m thinking of doing the same, looking at maxing 22% bracket. At current interest rates I might as well pay the taxes to government ASAP. An additional “tax” will be Medicare surcharge of about 3% of amount I’d be converting. Gotta believe brackets won’t be so friendly in the future.

If you go back and look at Federal Records following 1918 (WWI and Influenza Pandemic) and following (and leading up to) 1945 (WWII), there are extended and in the latter case 25-35 years of extended high tax ceiling rates. For example, the highest tax rate in 1975 was 70% adjusted for inflation $990,000+ in todays earnings. But go down to say $32,000 in 75 for married filing jointly and you have adjusted $153,000 of income today, your tax rate then was 42%.
I think that's a fair predictor of where our taxes may be headed. Those in the upper tiers may expect to pay taxes in 40 and 50 percentiles.

We are well under 59.5 - there should be no penalties for IRA to Roth IRA conversions beneath that age, correct?

We are looking at filling in some of our 24% bracket this year We realize its a gamble as in retirement we will certainly have lower income. Even at $60,000 equiv income in 1975, tax rate is still 28%....I'm thinking 30s are a good possibility for lower-middle tiers.

 

[Out-to-Lunch]

We are well under 59.5 - there should be no penalties for IRA to Roth IRA conversions beneath that age, correct?

Correct. There are no penalties on conversions for anyone, regardless of age.

 

[scubamonkey]

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.

I have about $80K of annual income

 

[linnemj]

I am now totally confused. We have pension income. I transferred money to open a Roth IRA in May with the idea of paying any tax owed when I filed our 2020 taxes next year. Do I have to make tax payments on that conversion this year? If I wait until next year will there be penalties?

Thanks!

 

[pb4uski]

Hard to tell based on what you wrote. Do you have tax withholding from your pension income? Do you normally get a significant refund or owe a little bit?

Need more to go on. If your Roth conversion was $100 then you're probably safe, but if it was $100 million then you have a really big problem.

 

[linnemj]

Hard to tell based on what you wrote. Do you have tax withholding from your pension income? Do you normally get a significant refund or owe a little bit?

Need more to go on. If your Roth conversion was $100 then you're probably safe, but if it was $100 million then you have a really big problem.

We do have withholding from our pension and usually get a small tax refund. I moved $75 K from our IRA into a newly established Roth IRA with Fidelity. The advisor at Fidelity offered me the choice of having tax withholding out of the transfer or pay it in 2021. This thread has me a little worried!

 

[SevenUp]

I am now totally confused. We have pension income. I transferred money to open a Roth IRA in May with the idea of paying any tax owed when I filed our 2020 taxes next year. Do I have to make tax payments on that conversion this year? If I wait until next year will there be penalties?

Thanks!

See Topic No. 306 Penalty for Underpayment of Estimated Tax | Internal Revenue Service:

Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding...of at least 90% of the tax for the current year or 100% [110% if last year's AGI was $150K+] of the tax shown on the return for the prior year, whichever is smaller

If you do nothing new, will you fit into any of these "safe harbors"? See that links and links therein for finer details.

 

[Rdub]

I retired 3 years ago and am now 50. Taxes are my largest retirement expense item: Fed (qtrly), state (annual in 2 states), property tax (2x per year x 4 properties in 2 states), rental related taxes (monthly). It was odd estimating and paying qtrly Fed taxes the first year. I slightly overpaid my first year, slightly underpaid in my second year and hoping to be close to break even this year. My Fed qtrly est include my estimated impact from converting a chunk of our 401k each year and rolling it into our Roth. Last year we converted six figures, and I plan to do about the same this year. We will see where tax rates go in 2021.

 

[imnontrad]

I have been doing the conversions last year and this year. And yes, I suck it up and make quarterly tax payments. For 2019, I did the conversion in December and had not made quarterly payments. Instead, I filed my income tax by January 30 this year to avoid a penalty.

Another thing to look at is Medicare premiums. If this is the year you turn 63, or are older, the modified AGI (including this conversion) will determine your Medicare premiums. There is a 2 year lag so your MAGI in 2020 will determine the 2022 Medicare premiums. If you go over 87K/single / 174/married, it will result in an increase of premiums.

 

[pb4uski]

We do have withholding from our pension and usually get a small tax refund. I moved $75 K from our IRA into a newly established Roth IRA with Fidelity. The advisor at Fidelity offered me the choice of having tax withholding out of the transfer or pay it in 2021. This thread has me a little worried!

It sounds like there may be just cause to worry.

If you plug your full year 2020 estimated numbers in to this tax calculator, how much will you owe? I suspect that you should either do an estimated payment or an additional tIRA withdrawal with 100% withholding (if you are over 59 1/2).

https://www.dinkytown.net/java/1040-tax-calculator.html

 

[JohnML]

I suspect that you should either do an estimated payment or an additional tIRA withdrawal with 100% withholding (if you are over 59 1/2).

https://www.dinkytown.net/java/1040-tax-calculator.html

Maybe an obvious question for folks here... How do you do an estimated payment? I have never done estimated taxes where you pay quarterly. I did a Roth conversion last year (first full year of retirement) and ended up under withheld so I had a small penalty. I'd like to avoid that this year. It wasn't much of a penalty, but it caused me to do a whole bunch of googling to figure out how I screwed up.

 

[RunningBum]

Maybe an obvious question for folks here... How do you do an estimated payment? I have never done estimated taxes where you pay quarterly. I did a Roth conversion last year (first full year of retirement) and ended up under withheld so I had a small penalty. I'd like to avoid that this year. It wasn't much of a penalty, but it caused me to do a whole bunch of googling to figure out how I screwed up.

Start at https://www.eftps.gov/eftps/ to enroll, and you also set up your payments there. It's been so long that I don't remember the steps but my memory is that it was easy.

Do a search for your state if you pay state taxes.

 

[pb4uski]

^^^ easiest way, or you can mail them a check with an estimated payment voucher.... actually if you sent them a check with your SS# ine memo field it would probably work but I try to limit where my SS# is out there.

 

[cathy63]

You can also do a one-time payment without enrolling here: https://directpay.irs.gov/directpay/payment?execution=e2s1

 

[CardsFan]

Start at https://www.eftps.gov/eftps/ to enroll, and you also set up your payments there. It's been so long that I don't remember the steps but my memory is that it was easy.

Do a search for your state if you pay state taxes.

JohnML: Once you enroll you will need to wait for a letter with your access info. Then you can easily set up the payments.

In my state (MO) the on-line system is cumbersome, and you can't set up future payments, so I just mail a check.

 

[RunningBum]

One thing I really like about EFTPS that the others may or may not have, is a record of your payments in one place. At tax time, or any other time throughout the year, I can verify all of the payments I've made, and also that the IRS has properly credited them to me.