Quarterly Estimates for Roth Conversion

Submitted by Amanda Minter on Wed, 2023-05-24 17:33

We did a Roth conversion last year for a client. Converted the whole amount and we had their tax professional prepare a quarterly estimate payment, which we funded from another source, but paid within the quarter of the conversion.

When their tax preparer did their 2022 taxes, he told them that they had to pay an under withholding penalty because they didn’t pay quarterly estimates through the entire year. We are seeking a resource that can explain/confirm if this is correct. I tried looking within the forum, but I could not locate anything specific to this situation.

Any guidance is appreciated!
Thank you!



Submitted by tomd37 on Wed, 2023-05-24 18:21

Although I cannot quote a specific site, I do know this is true.  I have personally gone through that situation the past two years and my TurboTax software, and other professional software programs, calculated and imposed a penalty amount automatically.  I think one could reduce that penalty by using the very cumbersome Form 2210, but that is nothing I would want to have to go through.  This year for my Roth conversion, which will happen after the completion of my RMD, I am going to have the necessary tax withheld from my last RMD so as to not incur the penalty.  I suspect our resident “expert” on this site will respond with a more complete answer.  In essence it is “pay as you go” situation leading to quarterly payments in your situation.  

Submitted by David Mertz on Wed, 2023-05-24 19:55

  • Paying estimates throughout the year is not a requirement.  They are credited on Form 2210 based on when the payment was made.  However, if the Roth conversion and estimated tax payment occurred late in the year, annualization of income, deductions and estimated tax payments would probably be needed to avoid the underpayment penalties for earlier quarters that would result using the default treatment that treats the income as having been received evenly throughout the year.  Because of the onerous nature of annualization where all of these are allocated to the appropriate tax quarters, it could end up being cheaper to pay the penalty than to pay a a tax preparer to prepare Schedule AI of Form 2210.
  • With regard to tomd37’s situation, the conversion of the entire gross amount distributed for the Roth conversion, including the withholding, can be accomplish by substituting other funds for the part withheld for taxes and doing an indirect conversion of that portion.

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