Another Roth conversion question - estimated quarterly payments?

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Macaroni2314
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Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

Hello,

I'm a single person in my 30's going through a gap year this year (2023) in employment by choice. I don't plan on working at all.

I've estimated that I'm going to have about $35k in qualified dividends through index funds.

I just converted $100k from my traditional IRA to my Roth IRA.

Do I need to make the tax payment now, or can I structure it in 4 quarterly payments?

Thanks in advance.
zero_coupon
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Re: Another Roth conversion question - estimated quarterly payments?

Post by zero_coupon »

You are not compelled to pay estimated taxes in advance of the "four equal quarterly payments" schedule. (Thus, you do not have to pay the whole lump sum now; you can pay quarterly instead.) Also, you are not compelled to pay more than 100% (or 110%, if you're a high-income earner) of your prior year tax bill as withholding/estimated payments for the current year, regardless of how much you'll actually owe for this year. (It's also sufficient to pay 90% of what you'll actually owe for the current year, in four quarterly installments.)
Topic Author
Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

This was sooooo helpful, thanks!!
Topic Author
Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

Sorry another question; how much can money can I convert from traditional to Roth totalto stay within the 24% tax bracket?

Is the math like this:

For single people, max income for 24% tax bracket is about $170k

1) index funds: $35k

2) $170k - $35k = $135k?

I'm confused about standard deductions and how that plays into this?
Chuckles960
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Chuckles960 »

Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth totalto stay within the 24% tax bracket?

Is the math like this:

For single people, max income for 24% tax bracket is about $170k

1) index funds: $35k

2) $170k - $35k = $135k?

I'm confused about standard deductions and how that plays into this?
The max for the tax bracket is not total income but taxable income (not including the standard deduction, long term capital gains or qualified dividends).

I don't see how you can determine your taxable gain from index funds at this point. Also index funds tend to give mostly qualified dividends, which are taxed separately and do not count for tax brackets (of course there are ifs and buts---e.g. while the tax rate for regular income is not affected by qualified dividends and capital gains, the tax rate for qualified dividends and capital gains depends on income).

I suggest you wait until late December to do the conversion, both so you will know what the dividends actually are (qual and non-qual) and to give yourself time to learn about this stuff.
Last edited by Chuckles960 on Fri Mar 31, 2023 1:01 pm, edited 2 times in total.
tibbitts
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Re: Another Roth conversion question - estimated quarterly payments?

Post by tibbitts »

Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth totalto stay within the 24% tax bracket?

Is the math like this:

For single people, max income for 24% tax bracket is about $170k

1) index funds: $35k

2) $170k - $35k = $135k?

I'm confused about standard deductions and how that plays into this?
You can factor in the standard deduction but you have to determine if you have any cliffs involved. You don't have IRMAA at your age for example so that's one thing you don't have to worry about. Anyway if you don't have cliffs don't get too hung up over exact amounts because it's not a huge problem if you go under or over a little; it's just not important to be that precise.
tibbitts
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Re: Another Roth conversion question - estimated quarterly payments?

Post by tibbitts »

Macaroni2629 wrote: Fri Mar 31, 2023 5:34 am Do I need to make the tax payment now, or can I structure it in 4 quarterly payments?
Do you have safe harbor from last year?
newacct
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Re: Another Roth conversion question - estimated quarterly payments?

Post by newacct »

The "schedule" that you have to pay at or above to avoid a penalty is whatever is the least of 3 schedules:
1) pay 1/4 of 100% (or 110% for high earners) of last year's tax liability each quarter
2) pay 1/4 of 90% of this year's tax liability each quarter
3) use the Annualized Income Installment Method, i.e. the amount that needs to be paid up to the nth quarter is n/4 times 90% of the annualized income from the income up to the nth quarter

If you go with 1/4 of 100% (or 110%) of last year's tax liability, then there's no risk with that, though last year's tax liability might be a huge overestimate of this year's tax if you are unemployed this year. If you go with 1/4 of 90% of this year's tax liability, then there is a risk because you don't know what this year's tax liability is going to be; you might have unexpected income in future quarters. If you want to go with this year's income, the only way to not have a risk is to pay enough for the Annualized Income method each quarter, and that would mean that if you do a conversion in the 1st quarter, you will have to pay 1st quarter estimated taxes based on an annual income of 4 times your conversion amount.
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FiveK
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Re: Another Roth conversion question - estimated quarterly payments?

Post by FiveK »

Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth total to stay within the 24% tax bracket?
You might want to use some maximum marginal tax rate instead of a tax bracket boundary for your limit. Those may or may not be the same thing.

See the Roth IRA conversion wiki, and the Worth pushing through the Social Security hump and/or IRMAA cliffs? section for more. Does that make sense?
tibbitts
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Re: Another Roth conversion question - estimated quarterly payments?

Post by tibbitts »

FiveK wrote: Fri Mar 31, 2023 12:32 pm
Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth total to stay within the 24% tax bracket?
You might want to use some maximum marginal tax rate instead of a tax bracket boundary for your limit. Those may or may not be the same thing.

See the Roth IRA conversion wiki, and the Worth pushing through the Social Security hump and/or IRMAA cliffs? section for more. Does that make sense?
I think the OP and most of us think of "bracket" as synonymous with "marginal rate" when things like state tax, NIIT and IRMAA etc. aren't involved. For my state and some others brackets are much simpler above a very low income limit, so if you have almost any income at all you just add a fixed percentage to the federal bracket and you're done. Anyway the conversion wiki yes, but the SS hump or IRMAA cliff... for a 30-year-old? Maybe I'm missing something.
Chuckles960
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Chuckles960 »

tibbitts wrote: Fri Mar 31, 2023 12:54 pmAnyway the conversion wiki yes, but the SS hump or IRMAA cliff... for a 30-year-old? Maybe I'm missing something.
There is a tendency on Bogleheads to give the most comprehensive and complicated answer, whether relevant or not. Partly it is because most of us are older, so this stuff is more interesting to us than it would be to a younger person.
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Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

tibbitts wrote: Fri Mar 31, 2023 12:11 pm
Macaroni2629 wrote: Fri Mar 31, 2023 5:34 am Do I need to make the tax payment now, or can I structure it in 4 quarterly payments?
Do you have safe harbor from last year?
Yes, I do! I also didn't work last year and didn't think to convert, so I paid very little taxes last year.

I just talked to my accountant today who confirmed I can use the Safe Harbor Rule! :)
Topic Author
Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

newacct wrote: Fri Mar 31, 2023 12:19 pm The "schedule" that you have to pay at or above to avoid a penalty is whatever is the least of 3 schedules:
1) pay 1/4 of 100% (or 110% for high earners) of last year's tax liability each quarter
2) pay 1/4 of 90% of this year's tax liability each quarter
3) use the Annualized Income Installment Method, i.e. the amount that needs to be paid up to the nth quarter is n/4 times 90% of the annualized income from the income up to the nth quarter

If you go with 1/4 of 100% (or 110%) of last year's tax liability, then there's no risk with that, though last year's tax liability might be a huge overestimate of this year's tax if you are unemployed this year. If you go with 1/4 of 90% of this year's tax liability, then there is a risk because you don't know what this year's tax liability is going to be; you might have unexpected income in future quarters. If you want to go with this year's income, the only way to not have a risk is to pay enough for the Annualized Income method each quarter, and that would mean that if you do a conversion in the 1st quarter, you will have to pay 1st quarter estimated taxes based on an annual income of 4 times your conversion amount.
I appreciate you detailing out all the risks for me! This was extremely clear, and I understand completely now, thank you.
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Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

FiveK wrote: Fri Mar 31, 2023 12:32 pm
Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth total to stay within the 24% tax bracket?
You might want to use some maximum marginal tax rate instead of a tax bracket boundary for your limit. Those may or may not be the same thing.

See the Roth IRA conversion wiki, and the Worth pushing through the Social Security hump and/or IRMAA cliffs? section for more. Does that make sense?
I've started looking at this; it's a bit overwhelming but I'm sure I'll get this with time, thank you!
Topic Author
Macaroni2314
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Re: Another Roth conversion question - estimated quarterly payments?

Post by Macaroni2314 »

tibbitts wrote: Fri Mar 31, 2023 12:54 pm
FiveK wrote: Fri Mar 31, 2023 12:32 pm
Macaroni2629 wrote: Fri Mar 31, 2023 10:20 am Sorry another question; how much can money can I convert from traditional to Roth total to stay within the 24% tax bracket?
You might want to use some maximum marginal tax rate instead of a tax bracket boundary for your limit. Those may or may not be the same thing.

See the Roth IRA conversion wiki, and the Worth pushing through the Social Security hump and/or IRMAA cliffs? section for more. Does that make sense?
I think the OP and most of us think of "bracket" as synonymous with "marginal rate" when things like state tax, NIIT and IRMAA etc. aren't involved. For my state and some others brackets are much simpler above a very low income limit, so if you have almost any income at all you just add a fixed percentage to the federal bracket and you're done. Anyway the conversion wiki yes, but the SS hump or IRMAA cliff... for a 30-year-old? Maybe I'm missing something.
I appreciate the explanation about "marginal rate" though; it will help me understand things on this message board so I can communicate better. Thank you.
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FiveK
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Re: Another Roth conversion question - estimated quarterly payments?

Post by FiveK »

tibbitts wrote: Fri Mar 31, 2023 12:54 pm I think the OP and most of us think of "bracket" as synonymous with "marginal rate" when things like state tax, NIIT and IRMAA etc. aren't involved. For my state and some others brackets are much simpler above a very low income limit, so if you have almost any income at all you just add a fixed percentage to the federal bracket and you're done. Anyway the conversion wiki yes, but the SS hump or IRMAA cliff... for a 30-year-old? Maybe I'm missing something.
Some people may indeed be thinking "marginal rate" when they say "bracket". Many people are shocked to find that their marginal rate is much higher than their nominal bracket rate.

The SS/IRMAA charts show some of the wilder effects, but the 27% marginal tax rate example in that wiki, and other surprises such as the one discovered in the Dividend tax rate calculation issue thread, can occur at any age.
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