Roth Conversion and Tax Withholding/Avoiding Underpayment Penalty | Ed Slott and Company, LLC

Roth Conversion and Tax Withholding/Avoiding Underpayment Penalty

63 year old taxpayer. Working for salary and gets normal W-2 each year. Has a Roth IRA which he opened by contribution 10+ years ago.

Wants to convert funds from his Rollover IRA to the Roth IRA.

Since this is a taxable event, what options does he have to avoid an underpayment penalty? Or should he not be concerned about this penalty?

Thank you.

He has the usual options for tax payments, either quarterly estimates or withholding from the TIRA or any other source of income such as his wages. If the conversions are limited in value compared to his wages, he could probably just increase his wage withholding, although only 1/3 of the year is left. He also only needs to meet a safe harbor for 2020 equal to his tax liability for 2019 (110% for higher incomes) if he uses withholding. Even if he comes up short, the interest rates are low (3% currently) so falling a little short should only produce a modest underpayment penalty.

 

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