March 17, 2021 at 2:04 pm #16198agawam27Participant
I completed a ROTH conversion this month (March) and no Federal taxes were withheld. My plan was to withhold additional Federal taxes from my remaining (April-December) Annuity checks to cover the Federal taxes (approximately $20K) due for this conversion.
1. Is the IRS notified of the MONTH and YEAR of the ROTH conversion or are they only notified of the YEAR?
2. Assuming the IRS is only notified of the YEAR, can I just ensure enough additional Federal withholding is taken from my remaining Annuity checks to cover the $20K taxes due for the ROTH conversion? —OR— do I need to file Estimated Quarterly Tax Payments?
Thank you!March 17, 2021 at 11:51 pm #16269Alan S.Participant
1) The IRS is only notified of the year on Form 1099R. The IRS then assumes that all your income was earned equally throughout the year. That’s good for you if your income such as this conversion occurs early in the year, but bad if the income comes late in the year.
2) If you can cover your annual safe harbor tax payments by withholding, it does not matter when the withholding is. It can all be in December and if it is enough, the IRS will not care that your conversion was in March. Estimates on the other hand are treated as paid exactly when they are paid, so an estimate you pay late in the year or January of the following year still may not prevent a penalty for earlier shortfalls.
3) It is advisable NOT to withhold from an IRA conversion distribution as it reduces the amount going into your Roth IRA, yet the taxable amount is the same as if it all went to your Roth. Conversion taxes should be paid using other funds than IRA funds.
4) Even if you end up owing next year, you will not be penalized if you meet a “safe harbor”, which is paying in at least 100% of your prior year tax liability (2020), or 110% for higher incomes, or 90% of your current year (2021) tax liability. These tax payments can be made anytime if done via withholding, or must be done by equal quarterly estimate due dates when paying quarterly estimates.
5) Therefore, when you set up withholding you could opt to just withhold enough to meet your safe harbor and avoid penalty even though you would owe more when you file, or you could set it up to about what you think your 2021 tax liability will be when you file. That would have the additional advantage of not owing much when you file.March 18, 2021 at 12:34 am #16279agawam27Participant
Thank you Alan for the detailed information! Since the IRS is only notified of the YEAR of the ROTH conversion, I will just increase the Federal withholding on my remaining CY2021 monthly Annuity checks to cover the $20K taxes due for the ROTH conversion made in March2021.March 19, 2021 at 12:36 am #16448Alan S.Participant
Note that even if the IRS knew that you converted this month, they would be satisfied with your withholding plans. You do not have to “pay as you go” when you use withholding.
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