December 2012 Roth Conversion
Ernie and Debbie converted their IRA’s totaling $389,000 on December 20th, 2012. For all other income they paid qrterly payments that totaled in excess of $110 percent of the 2011 tax amount. (I belive this is safe harbor) If they file an extension on April 15th 2013, for the 2012 tax year – allowing them until Oct 15th, 2013 to either finally decide to keep the tradional converted to a Roth – or decide to re-characterize as a traditional prevoius to Oct 15th, 2013 –
Does the Tax caused by the conversion create a penalty if they pay the tax on the conversion by the extension due date of Oct 15th, 2013?
I assume they will have to pay interest to the IRS for the unpaid tax due – is this tru given it was a conversion?
Permalink Submitted by Alan - IRA critic on Sat, 2013-04-13 00:59
Underpayment penalties for conversion income is no different than other income types. If they met the safe harbor for 2012 tax payments, the only penaly remaining will be for payment of the rest of the balance later than 4/15. The amount converted is substantial and will also increase their tax bracket, so late payment of the taxes may not be their main problem. Most people convert incremental amounts to keep the tax cost down, but perhaps 389k IS an incremental amount if they are very wealthy. Remember that they can do a partial recharacterization designed to top off one of their brackets, and that would reduce their tax bill and the late interest.
Permalink Submitted by Bruce Steiner on Sun, 2013-04-14 13:28
They may be able to qualify for the exception to the estimated tax penalty for the first three payments based on their actual income through March 31, May 31 and August 31.As Alan points out, sometimes it’s better to convert all at once, and sometimes it’s better to convert some each year (and sometimes it’s better to wait until a later time to convert or to begin to convert, and sometimes it’s better not to convert at all). They should review their situation to make sure they’re making the choice that appears best.