When exactly Roth conversion tax is due

Submitted by ANITA DUSZYNSKA on Thu, 2020-05-14 13:43

Hi,
I converted IRA to Roth in March, 2020. I was trying to find a clear answer to my question: “when exactly conversion tax is due” and everywhere I read that early conversion gives one more time to pay taxes. I received a suggestion that this tax is due with annual return, when the broker’s house will send me the form confirming such conversion.
In some articles there was a note that “I may pay estimated taxes before the annual return”. But still no concrete answer if the tax is due in the quarter of conversion or I can pay it whenever I wish during the year.
On the forum at www.purefinancial.com/ymyw/podcasts I found the exactly the same question and the response was that conversion tax can be paid quarterly in equal installments.

IRS penalizes tax payments with annual return if they are over $ 1,000. Thus, I understand that I cannot wait till that moment.
Or, since the converted funds are not “available” to me for 5 years, I do not have to worry about penalty and can pay tax with annual return???
The only withholding that I have now is from SS benefits and I cannot increase it to the level I would need for Roth tax. I will also not pay 90% of taxes for last year, because I retired.
So, I decided to follow the suggestion from purefinancial and pay estimated taxes in equal quarterly installments.
But is still bothers me, because I think that this tax is due for the 1st quarter, despite that IRS does not know, when I did the conversion.
Again, nowhere I found the concrete answer, so please help me understand how it should be done. That can be important for other people as well.

Thanks a lot for all informative materials, priceless for people like me.

Anita Duszynska



Submitted by David Mertz on Thu, 2020-05-14 14:26

  • The taxable amount of a Roth conversion is income that is realized at the time of the conversion.  As such, it is income allocable to the tax quarter in which the Roth conversion is performed.
  • IRS Tax Topic 306 describes how to avoid a tax underpayment penalty:  

Submitted by ANITA DUSZYNSKA on Thu, 2020-05-14 18:19

Hi, thank you for the response. One more doubt: conversion to Roth is not available to me for 5 years, so it is unrealized income really. Does that change anything?Thanks a lot.

Submitted by Alan - IRA critic on Thu, 2020-05-14 19:37

The taxation of a Roth distribution has no effect on when you must pay taxes on conversions. You can withdraw your Roth conversions without tax, but will owe a 10% penalty if you withdraw a taxable conversion within 5 years. When you convert you do not pay the penalty for taking an early distribution from your TIRA account, so the 5 year holding period prevents you from doing a conversion just to get your money out of your TIRA penalty free. If you made regular Roth contributions in the past, those contributions come out before your conversions, then conversions come out with older conversions first, therefore a better chance that you will not need to withdraw the conversions in the first 5 years. Finally, there are some situations in which the penalty is waived such as reaching 59.5, disability, buying a first home, paying higher education expenses, high medical bills, etc.

Submitted by David Mertz on Thu, 2020-05-14 20:14

  • “conversion to Roth is not available to me for 5 years, so it is unrealized income really.”
  • Actually, it really is realized income, otherwise it wouldn’t be present in your AGI for the year of the conversion.  As Alan said, a distribution from a Roth IRA can be made at any time.  A distribution of conversion basis is not taxable as income even if done before the completion of the 5-year period before reaching age 59½ (because the income has already been realized and taxed), it’s just subject to a 10% recapture tax (an excise tax, not an income tax) unless you qualify for one of the exceptions.

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