Do I owe estimated taxes on a Roth Conversion?
I am going to convert some of my IRA to a ROTH this year. I have the money outside of my IRA to pay the taxes. Do you know if I need to pay estimated taxes on the conversation or just pay the cost when I file my 2017 taxes. I am thinking I will need to pay an additional 14K in taxes.
Terry Says
THIS April you will file your tax return for 2016. If you convert now, in 2017, the taxes won't be due until April, 2018. HOWEVER, you may be required to make an estimated tax payment during the current year to cover the taxes on the conversion. The rule is: IF your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90 percent of this year's income tax liability or 100 percent of your income tax liability from last year. If your AGI was over that amount, then you must pay you either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability. Basically, if your withholding for the year equals the amount of tax you owed in the previous year, then you wouldn't need to pay estimated taxes, no matter how much extra tax you owe on your windfall. However, you should set aside money to pay the taxes when you file in 2018! OK, those are the rules. BUT each situation is individual, and I am not a tax advisor, so I suggest you consult a professional who can look over your entire tax picture and advise you best. Penalties for underpayment are significant, so it's worth paying a CPA to take a look at your situation.
