Ask Terry Questions Estimated tax payments on Roth Conversion

Estimated tax payments on Roth Conversion

By Terry Savage on March 08, 2020 | Financial Planning / Retirement

Hi Terry. We’re both 66, retired, but not receiving social security yet. We’ve been living off after-tax investments and therefore the only federal tax we pay is from our interest and dividends. This year we’re thinking seriously about doing a Roth conversion of some money we have in traditional IRA’s. That move will move us into the 22% tax bracket. If we make that move in 4Q2020, do I have to make rateable estimated tax payments as early as April OR just wait until Dec 15-2020 and send it in? I don’t want to get caught with any underpayment penalties. Thanks.

Terry Says

The general rule is you need to make estimated tax payments if you expect to owe $1,000 or more in taxes when you file your annual return. The “safe harbor” says you’ll be ok if you pay
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return.

If last year you paid taxes on more than $1,000 of dividend income or other income you received, they you probably are paying quarterly estimated taxes THIS year. It’s safe if you pay 100% of the taxes that you owed last year. But if you know you are going to generate a taxable gain, you’re probably better off increasing your quarterly estimates to 90% of THIS year’s expected income!

One more thing — though you didn’t ask. Don’t do your Roth conversion at the TOP of the market! Yes, I know that no one knows that. But you might want to wait to see if we go into a bear market. No sense in paying taxes on the conversion at high prices and then watching the market value decine!



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