Conversion – Traditional to Roth
My wife and I (both 61) are planning conversions from our Traditional IRAs to our Roths in Jan 2017 (to maximize our recharacterization opportunity). The plan is to convert $25k each year in January until the Traditional IRAs are exhausted. We’ve already estimated the basis at approximately 10% of each IRA so that step of the plan is complete. So here’s the question:
1 – Assuming a conversion in Jan 2017, is there a method to estimate and pay the taxes at the time of the conversion so we are not caught up in a situation where our income significantly increased causing a tax penalty due to underpayment of taxes?
Overall, we would much prefer to take funds from our other investments to pay an estimate tax based on the conversion at the time of the event rather than increasing our monthly tax payments from my USAF retirement check.
We look forward to your insights and thanks in advance for your assistance.
Permalink Submitted by Alan - IRA critic on Sat, 2016-08-20 00:32
To avoid underpayment penalties, you would try to meet one of the safe harbors, the most likely being paying in 100% (110% if AGI over 150k) of your prior year tax liability in equal quarterly estimates or by withholding from your pension. If you use pension withholding, it does not matter when in the year the withholding is paid to the IRS. Since the first estimate is not due until 4/15, you should generally know your prior year tax liability by that time and would pay 25% of that in each quarterly estimate. Note that if you recharacterized the conversions for a certain year, your tax liability would drop that year, and the following year you only have to pay in based on the reduced tax liability. Remember, each conversion tends to save you less than later conversions because each conversion reduces your future RMDs. Eventually, your RMDs are reduced enough that it could lower your marginal rate in retirement and make it more unlikely that you could convert at a rate that was less than or equal to your reduced rate in retirement. In other words, be careful not to over convert.
Permalink Submitted by Kirk Ferrell on Sat, 2016-08-20 01:32
Your pormpt and clear explaination is most appreciated!