Roth Conversion and Underwithholding Penalty
I am getting ready to convert $70,000 (no withholding) of a client’s IRA to a Roth IRA for 2009. The total taxable income before the conversion will only be about $65,000. If we don’t do a conversion we are estimating the client will get a tax refund. If we do a conversion the client will have a tax due of about $15,000. Will this cause a underwithholding penalty or do Roth conversions not factor into the penalty?
Thanks,
Sean
Permalink Submitted by Alan Spross on Thu, 2009-12-17 23:27
The conversions can easily contribute to an under withholding penalty if the client does not meet one of the safe harbors to avoid the penalty. Paying in equal quarterly estimates or withholding sequal to the 2008 tax liability (110% if AGI over 150,000) is one of the safe harbors as is payment of 90% of the current year’s tax.
If a safe harbor is not met, use of the annualized installment income method for late year conversions would reduce the underwitholding penalty, but that form is a bear to complete.