When Is Tax Due on Roth Conversion?
When is federal tax due on a Roth conversion? For example, if I convert from my rollover IRA to a Roth IRA today, would the tax be due by the next estimated-tax date in April 2011 or when my 2011 federal taxes are due in April 2012? Thank you in advance for your response.
Permalink Submitted by Alan Spross on Wed, 2011-02-23 19:52
It is handled like any other income. If you are just looking to avoid penalties you must meet a safe harbor which is either:
100% of your 2010 tax liability (110% if your income is over 150k) Or
90% of your 2011 tax liability (but you probably will not know what this # is)
If you pay by withholding the amounts can be withheld anytime during the year, but if you pay quarterly estimates you should pay them in equal installments. You do not have to pay the entire conversion tax on your first installment. If you pay by combining withholding and estimates, first reduce the tax due by withholding and then pay the balance in equal quarterly estimates.
Of course, if you did a 2010 conversion, you have the choice to defer the income over the next two years.
Permalink Submitted by Peter Lingane on Wed, 2011-02-23 20:19
Alan is talking about the federal estimated tax requirements. State requirements may be different.
Consider having your tax preparer do the estimated tax calculations for you. I know of a situation where a seemingly innocuous error in state estimated tax increased the federal liability by $30K (tax, not penalty). Fortunately, the preparer’s liability insurance made the taxpayer whole.