Q&A: Plan ahead to pay for Roth IRA conversion

May 7, 2010

If individuals convert their Roth IRAs in 2010 and opt to recognize the income in 2010, then they may wish to be careful to pay 110 percent of their 2009 tax liability over the course of 2010 through withholding or estimated payments.

Q: If one does convert a Roth IRA account, one may have a large tax payment that year. Does one also get the penalty for underpaying quarterly prepaid estimates because this was a new, "unexpected" expense, or is it excused from the penalty because of that?

A: If individuals convert their Roth IRAs in 2010 and opt to recognize the income in 2010, then they may wish to be careful to pay 110 percent of their 2009 tax liability over the course of 2010 through withholding or estimated payments. If they convert a Roth IRA in 2010 and opt to recognize the income in 2011 and 2012, then they may delay making significantly higher estimated payments/withholding until 2012. In addition, a strong possibility exists that income tax rates will increase in 2011, and an income tax rate increase could offset the benefit of income tax deferral if income is recognized in 2011-2012. Everyone considering Roth IRA conversion should verify this information with an accountant or tax lawyer.