Plan for current year IRA to Roth IRA tax payment

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susa
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Plan for current year IRA to Roth IRA tax payment

Post by susa »

Is this correct for a conversion and tax plan ?

MFJ, over 65, no income, not collecting SocSec, created a taxable "income event" by conversion 109,000.00 from IRA to a Roth IRA.
The plan is to convert in December and make a 1040ES online payment same month to IRS for approximately 9,433.00

The conversion amount is flexible (just keeping it at 12% tax rate) but one concern is; Would IRS require the 9k payment to be made in quartely amounts or is it Ok to make a lump sum payment in December ?

from users.nber.org/~taxsim/taxsim27/

Basic Output:
1. Record ID: 1.
2. Year: 2021
3. State (SOI code): 0
4. Federal IIT Liability: 9432.23
5. State IIT Liability: 0.00
6. SS Payroll Tax Liability: 0.00
Marginal Rates wrt Earner
7. Federal Marginal Rate: 12.00
8. State Marginal Rate: 0.00
9. Taxpayer SS Rate: 15.30

Federal Tax Calculation: Base + $1
10. Federal AGI 109000.00 109001.00
11. UI in AGI 79+ 0.00 0.00
12. Social Security in AGI 84 0.00 0.00
13. Zero Bracket Amount 27001.06 27001.06
14. Personal Exemptions 0.00 0.00
15. Exemption Phaseout 91+ 0.00 0.00
16. Deduction Phaseout 91+ 0.00 0.00
17. Deductions allowed 0.00 0.00
18. Federal Taxable Income 81998.94 81999.94
19. Federal Regular Tax 9432.23 9432.35
20. Exemption Surtax 88-96 0.00 0.00
21. General Tax Credit 75-78 0.00 0.00
22. Child Tax Credit*17/22 98 0.00 0.00
23 Refundable Part 0.00 0.00
24. Child Care Credit 76+ 0.00 0.00
25. Earned Income Credit 75+ 0.00 0.00
26. Alternative Min Income: 109000.00 109001.00
27. AMT 0.00 0.00
Additional Medicare Taxes 2013+
XX Net Investment Income Tax 0.00 0.00
XX Additional Tax on Earning 0.00 0.00
28. Income Tax Before Credits 9432.23 9432.35
29. FICA 0.00 0.15

Decomposition of Federal Marginal Rate
(taxpayer earned income)

Regular Income Tax
Bracket rate from X,Y or Z 12.00
terran
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Re: Plan for current year IRA to Roth IRA tax payment

Post by terran »

Estimated tax should be paid in 4 equal installments OR as the income is earned. Since you plan to earn the income in the 4th quarter you can make only a 4th quarter (January 15th) payment without penalty. You'll need to fill out the somewhat more complicated annualize income part of form 2210, but it shouldn't be too bad.

In addition to when the payment is made, you'll also want to familiarize yourself with the safe harbors to avoid an underpayment penalty. The sort version is, as long as you 1) owe less than $1000, 2) pay at least 90% OR 3) pay at least 100% of last years tax (110% if AGI is over $150k) then you won't owe a penalty. You'll find all of this as you fill out form 2210 as well.
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susa
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Re: Plan for current year IRA to Roth IRA tax payment

Post by susa »

Would it be Ok to make the estimated 9k payment in June - ahead of time - even if the income/conversion is not done until December ?

is there a simpler/easier/faster way of doing this ? No surprises are in store since a full payment of all taxes originate only from this one planned approximately 109k IRA to Roth conversion and there is no other income and only standard deductions are taken.
pshonore
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Re: Plan for current year IRA to Roth IRA tax payment

Post by pshonore »

No reason to do it early. What if you pay in June and then change your mind? As long as you pay by 1/15/22, you should be ok, although Form 2210AI is not the easiest form to fill out but it can be done. You may want to look at it ahead of time.
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susa
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Re: Plan for current year IRA to Roth IRA tax payment

Post by susa »

Since we have not paid any income taxes last 10 years (literally zero dollars with zero income), it appears form 2210 instructs us not to file it as there is no underpayment based on previous years and no underpayment based on this one annual single income event.
terran
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Re: Plan for current year IRA to Roth IRA tax payment

Post by terran »

susa wrote: Mon May 17, 2021 10:57 am Since we have not paid any income taxes last 10 years (literally zero dollars with zero income), it appears form 2210 instructs us not to file it as there is no underpayment based on previous years and no underpayment based on this one annual single income event.
I think you might be mistaken about that. The instructions for line 8 say ". If you didn't file a return for 2019 or your 2019 tax year was less than 12 months, don't complete line 8. Instead, enter the amount from line 5 on line 9."

Based on this, here's how I would fill out Part I for you:
1. $9432
2. $0
3. $0
4. $9432
5. $8489
6. $0 (note that this says withholding taxes only, not including estimated taxes)
7. $9432
8. N/A
9. $8489

Since line 9 is more than line 6 and I believe Part II Box C would apply: "Your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income installment method." You should fill out Schedule Al and file Form 2210.

You say this is a one time thing. Do you mean you have no other traditional IRAs? I wonder if you might be better off converting this $109,000 over the next 4-5 years instead of all at once? if you did that you'd be able to keep all/most of it within the standard deduction and pay no income tax, unless you expect to have a new source of income starting?
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susa
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Re: Plan for current year IRA to Roth IRA tax payment

Post by susa »

terran wrote: You say this is a one time thing.
Thank you, that mock-up helps.

No, this is from now and on-going plan until we reach 70 and the amount will grow little each year as long as we stay in the 12% tax range. RMD's will kick in later but at least this slows the tax bite a little once we opt in for SocSec at 70.
terran
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Re: Plan for current year IRA to Roth IRA tax payment

Post by terran »

Gotcha. Then I would plan on paying in the 4th quarter and completing the annualize section OR pay enough to meet a safe harbor in 4 equal installments each quarter (not an option this year since you missed the 1st quarter) and use the 2210 short form by completing lines 10-14.
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WoodSpinner
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Re: Plan for current year IRA to Roth IRA tax payment

Post by WoodSpinner »

OP,

Even easier is to have the taxes withheld as part of the Conversion. No need to worry about estimated payments or timing.

WoodSpinner
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FiveK
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Re: Plan for current year IRA to Roth IRA tax payment

Post by FiveK »

susa wrote: Mon May 17, 2021 9:43 am Is this correct for a conversion and tax plan ?

MFJ, over 65, no income, not collecting SocSec, created a taxable "income event" by conversion 109,000.00 from IRA to a Roth IRA.
The plan is to convert in December and make a 1040ES online payment same month to IRS for approximately 9,433.00

The conversion amount is flexible (just keeping it at 12% tax rate)

from users.nber.org/~taxsim/taxsim27/

Basic Output:
2. Year: 2021
3. State (SOI code): 0
4. Federal IIT Liability: 9432.23
Marginal Rates wrt Earner
7. Federal Marginal Rate: 12.00

Federal Tax Calculation: Base + $1
10. Federal AGI 109000.00 109001.00
13. Zero Bracket Amount 27001.06 27001.06
18. Federal Taxable Income 81998.94 81999.94
19. Federal Regular Tax 9432.23 9432.35
Regular Income Tax
Bracket rate from X,Y or Z 12.00
It's not a big deal but that program seems incorrect. The 2021 Standard Deduction Amount will be $25,100 + ($1,350 * 2) = $27,800. The 22% bracket for MFJ will start at $81,050, so converting $109K will put you $150 into the 22% bracket and the federal tax will be $9,367.

As others have said, a one time estimated tax payment of that amount in the same "quarter" (per Form 2210 definition) you do the conversion will suffice.

If you can make the estimated tax payment from cash on hand, all the $109K will go into the Roth account.
Imadeit
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Re: Plan for current year IRA to Roth IRA tax payment

Post by Imadeit »

WoodSpinner wrote: Mon May 17, 2021 8:54 pm OP,

Even easier is to have the taxes withheld as part of the Conversion. No need to worry about estimated payments or timing.

WoodSpinner
I did a Roth conversion this year. Both rollover IRA and Roth IRA accounts are in Vanguard. To execute the Roth conversion Vanguard does not allow taxes withheld from the IRA conversion money. I didn’t want taxes withheld from the conversion transaction anyways since I wanted to pay taxes from my after tax account. I paid the taxes right after the conversion from my cash account so I didn’t need to worry or remember about it.
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CenTexan
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Re: Plan for current year IRA to Roth IRA tax payment

Post by CenTexan »

WoodSpinner wrote: Mon May 17, 2021 8:54 pm OP,

Even easier is to have the taxes withheld as part of the Conversion. No need to worry about estimated payments or timing.

WoodSpinner
OK. Getting confused now. The above is what I have always done - and recall many posts (especially from Celia - I think?) on this site saying it is ok to do it this way. But terran (posts above) says the tax on a conversion is due during the quarter it is executed.

Who is correct? Can someone site IRS info on it? :confused
Last edited by CenTexan on Tue May 18, 2021 9:05 am, edited 1 time in total.
scifilover
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Re: Plan for current year IRA to Roth IRA tax payment

Post by scifilover »

I did a conversion in Dec of 2020 and sent in an extra estimated tax payment which more that offset the additional tax. When I did my taxes on TurboTax I found that I had a penalty for the timeliness and amounts of my estimated tax payments. I then went through the additional quarterly annualization of income form in an attempt to eliminate the penalty. While the penalty was significantly reduced, there was still a penalty!

The IRS discriminates against those who pay estimates rather than have income taxes withheld. If I had had the broker withhold the exact same amount from the conversion, on the same date, there would have been no penalty.

So if you are doing a late in the year conversion and paying taxes via estimated taxes, you need to increase the amount of your estimates paid in April, June, and September to cover 3/4 of the additional tax, or you will have a penalty.
hulburt1
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Re: Plan for current year IRA to Roth IRA tax payment

Post by hulburt1 »

I'm 68. I have a part time job that is only 6 months a year. I just have 80% from my w4 sent to Gov.
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FiveK
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Re: Plan for current year IRA to Roth IRA tax payment

Post by FiveK »

CenTexan wrote: Tue May 18, 2021 8:07 am Who is correct? Can someone site IRS info on it? :confused
Form 2210 provides the answers.

The further you have to go in that form, the more complicated it gets, but you may not need to go far to understand your situation.

If you do a draft version for yourself, what do you find?
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CenTexan
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Re: Plan for current year IRA to Roth IRA tax payment

Post by CenTexan »

FiveK wrote: Tue May 18, 2021 10:03 am
CenTexan wrote: Tue May 18, 2021 8:07 am Who is correct? Can someone site IRS info on it? :confused
Form 2210 provides the answers.

The further you have to go in that form, the more complicated it gets, but you may not need to go far to understand your situation.

If you do a draft version for yourself, what do you find?
OK. So looking at the flowchart on Form 2210, it seems obvious that I owe no penalty. It also appears (to my limited understanding) that the OP would owe no penalty, either.

I'll just start a new thread with my question rather than hijack this one :happy
terran
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Re: Plan for current year IRA to Roth IRA tax payment

Post by terran »

CenTexan wrote: Tue May 18, 2021 8:07 am Who is correct? Can someone site IRS info on it? :confused
If I told you that estimated payments must be made either in 4 equal installments OR as the income is earned, but withholding is assumed to be timely no matter when it's withheld, would that answer your question?
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CenTexan
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Re: Plan for current year IRA to Roth IRA tax payment

Post by CenTexan »

terran wrote: Tue May 18, 2021 1:19 pm
CenTexan wrote: Tue May 18, 2021 8:07 am Who is correct? Can someone site IRS info on it? :confused
If I told you that estimated payments must be made either in 4 equal installments OR as the income is earned, but withholding is assumed to be timely no matter when it's withheld, would that answer your question?
Er . .. y-y-y-e-e-s-s . . . so if no earned income: do Roth conversion in Jan, have $0 withheld. Do another conversion in Dec, have $(full tax amount) withheld = no quarterlies made, no penalty, and Uncle Sam is happy, right?
terran
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Re: Plan for current year IRA to Roth IRA tax payment

Post by terran »

CenTexan wrote: Tue May 18, 2021 2:06 pm
terran wrote: Tue May 18, 2021 1:19 pm
CenTexan wrote: Tue May 18, 2021 8:07 am Who is correct? Can someone site IRS info on it? :confused
If I told you that estimated payments must be made either in 4 equal installments OR as the income is earned, but withholding is assumed to be timely no matter when it's withheld, would that answer your question?
Er . .. y-y-y-e-e-s-s . . . so if no earned income: do Roth conversion in Jan, have $0 withheld. Do another conversion in Dec, have $(full tax amount) withheld = no quarterlies made, no penalty, and Uncle Sam is happy, right?
Yes, that would work (assuming you're over 59.5, otherwise there would be penalties). The reason you might not want to do this is if you wanted to pay the tax out of taxable to end up with more in Roth. Remember that the amount withheld is also taxable income.
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CenTexan
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Re: Plan for current year IRA to Roth IRA tax payment

Post by CenTexan »

Got it! :greedy

For some reason I read most of the above posts in a manner that sparked a little of that ole "IRS audit" fear. :moneybag

Thanks!
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WoodSpinner
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Re: Plan for current year IRA to Roth IRA tax payment

Post by WoodSpinner »

CenTexan wrote: Tue May 18, 2021 8:07 am
WoodSpinner wrote: Mon May 17, 2021 8:54 pm OP,

Even easier is to have the taxes withheld as part of the Conversion. No need to worry about estimated payments or timing.

WoodSpinner
OK. Getting confused now. The above is what I have always done - and recall many posts (especially from Celia - I think?) on this site saying it is ok to do it this way. But terran (posts above) says the tax on a conversion is due during the quarter it is executed.

Who is correct? Can someone site IRS info on it? :confused
When you withhold taxes the quarterly requirements are waived. It’s as if you had a regular paycheck.

Either way will wok, but withholding is simpler. I do a final conversion in December and withhold enough to meet my safe harbor requirements. I prefer to owe some taxes when filing a return.

WoodSpinner
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