Paying Taxes on Conversion to Roth by Check
I’m still working through an analysis of whether or not to run conversions from TIRA to RIRA. I’m feeling pressure from the “shot clock” (end of the tax year is fast approaching!). But I might need until the last week of December to complete the analysis (busy at a day job that is completely removed from IRAs and taxes, busy in personal life with holidays coming, etc.). I may not be able to decide to do the conversion until the last week of December. Do I have to have the check to pay the taxes on the conversion in the mail by 31-Dec-2015? Or do we have until 15-Jan-2016 to get it in the mail for the 2015 tax year? Will a check received in January be assumed to be a quarterly estimated payment for 2016 instead? What if any paperwork is sent with a check to have the IRS count it against the 2015 tax bill, to avoid any nastiness about underpayment penalties?
Permalink Submitted by Alan - IRA critic on Fri, 2015-12-04 18:11
Do not wait too long or the conversion request may not get processed due to the Holiday rush. If you run out of time to develop an ideal amount to convert, you can always convert a higher amount, and recharacterize a portion of that later on to bring it down to the exact amount you want to pay taxes on. Of course, you can also recharacterize all or part if your conversion suffers losses and you do not want to pay taxes on phantom values. As for taxes, if you are not paying quarterly estimates now, you can download the form 1040 ES and pay the 4th Q installment only due 1/15. Do not send in a separate check without that form. Better yet, if you have any withholding source increase the withholding as high as you can right away through year end. This is better than the estimate because the IRS does not know when you converted and deems your total taxes to be due equally throughout the year. Paying the January installment does not necessarily waive penalties for the first 3 quarters, only the 4th since estimates are credited when paid. But withholding is deemed paid equally throughout the year even if paid in December. It eliminates problems for the first 3 quarters. Finally, remember that there are safe harbors for the amount you paid in. 100% of last year’s tax liability (110% for higher earners) is one of them so if you paid in that amount you will not be penalized on taxes due in excess of that no matter how much you owe.
Permalink Submitted by Amar Patel on Fri, 2015-12-04 21:44
We might have missed the window to increase withholdings for December pension and Social Security payments. But I can double-check last year’s tax liability to see if we’ve already covered 100% of that in withholdings this year, to get into that safe harbor. But can you walkthrough a scenario where the IRS does try to impose an underpayment penalty? Meaning, we hadn’t considered conversions to Roth or additional distributions beyond RMDs until recently, so it would be hard to know, say in January 2015, what estimated payments we’d want to setup on a quarterly basis for 2015. So if we only convert in December 2015, and not every quarter all year long, and send along a separate check to the Treasury for 20% of the value of the conversion, the IRS would still attempt to ding us for “missing” estimated payments from earlier in 2015? Would that be something that could be explained in a letter to have waived, or does the IRS not consider that?
Permalink Submitted by Amar Patel on Sat, 2015-12-05 02:07
Does anyone here have experience with pay-as-you-go-conversions? I haven’t had a chance to find the tax records for last year, to compare them to withholdings so far this year. But I’m concerned that we aren’t in the safe harbor (having paid 100% of last year’s liability). And so if we make a big conversion now, I’d want a send a check to the Treasury to cover the expected tax. But it seems as if I’m missing something if the IRS then looks back at us and penalizes us for not sending in estimated payments earlier in the year, when we hadn’t considered doing any conversions yet.
Permalink Submitted by Alan - IRA critic on Sun, 2015-12-06 00:17
You can send in the check as a quarterly estimate as I indicated earlier. You can then file Form 2210 AI, the annualized income installment method. On this form you break down your income and deductions by 4 time periods that reflect when the quarterly estimates are due. The result is that if most of your income was in the 4th time period, you will incur an underpayment penalty for the earlier 3 periods. This is effectively a pay as you go method. That said, this form is time consuming and complex and most people want to avoid it if possible. The interest rate for underpayment is still very low.
Permalink Submitted by Amar Patel on Mon, 2015-12-07 04:44
Where can I find how much is being withheld from Social Security payments being made? Can I log into the SSA site online and find such records? Admittedly this information should already be in our records, and they still may be (we reorg’d the entire house earlier this year, and files got shuffled all over). But we may be into the safe harbor vs. 100% of the 2014 tax liability. But I’d like to verify before converting enough to reach into the upper limits of the 15% bracket.