Estimated quarterly’s on ROTH conversion
A client wants to convert $200k. Should he pay estimated taxes on that? The internet just keeps saying ‘maybe’. They are not self employed and don’t already pay estimated quarterly’s.
I searched the entire pub 505 and the word ROTH comes up once not in reference to conversions and the word convert or conversion doesn’t come up at al in reference to ROTHs. So that publication isn’t very helpful. Maybe just the text in Topic 306 that says…”Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.” Of course, they use the word ‘generally’. Just trying to have my clients avoid a penalty.
A Roth conversion is taxable a ordinary income. This income increases tax liability just like any other ordinary income such as wages, so there is no need to seach for anything Roth-specific in Pub 505. If the client is unable to determine their overall estimated tax liability including the Roth conversion, perhaps they should be referred to a CPA.
I get that it’s taxable income and I also can figure out thier tax liability, what I’m trying to figure out per my original question is can they wait until the following year to pay the taxes or should they pay estimated quarterly’s BEFORE the end of they so they don’t get a penalty. The question arises because they have NO money outside of retirement accounts so to take out more taxable money to pay the estimates will knock them into the next bracket so I’m trying to get them to avoid pay 32% on it. I’d like to wait until the following year but I don’t want them to pay a penalty.
I get that it’s taxable income and I also can figure out thier tax liability, what I’m trying to figure out per my original question is can they wait until the following year to pay the taxes or should they pay estimated quarterly’s BEFORE the end of they so they don’t get a penalty. The question arises because they have NO money outside of retirement accounts so to take out more taxable money to pay the estimates will knock them into the next bracket so I’m trying to get them to avoid pay 32% on it. I’d like to wait until the following year but I don’t want them to pay a penalty.
- By itself, there is no way to know if a particular taxable retirement distribution will trigger an underpayment penalty or not. Proper tax planning must generally done by preparing an anticipated tax return. If the client has no sources of tax withholding and does not make timely estimated tax payments, the client will have an underpayment penalty unless their tax liability for the year is $1,000 (a $1,000 balance due) or less or they had no tax liability the previous year. These safe harbors are described in the IRS references I provided. If neither safe harbor applies, paying estimated taxes late will result in an underpayment penalty because the penalty is calculated per tax quarter and estimated tax payments are not credited toward quarterly tax liability until actually received.
- If the client does not have funds outside of retirement accounts with which to make necessary estimated tax payments, the client will need to make an additional retirement-account distribution and preferably have some or all of that additional distribution withheld for taxes, or use the additional money distributed to make an estimated tax payment. To avoid going over a particular income threshold they will need to consider the combined amount of Roth conversion and additional distribution since both of these will add to their AGI.
- Any underpayment penalty is figured on Form 2210, so if you have all of the information necessary to determine their overall tax liability for the year, with the addition of their previous year’s tax liability you’ll also have the necessary information to prepare Form 2210 to determine if they will have an underpayment penalty. I again suggest referring the client to a CPA or tax advisor.
Permalink Submitted by David Mertz on Thu, 2019-06-13 22:57