When do I have to pay tax on a Roth conversion?


Q. If I carry over $100,000 on January 10, 2022 from a traditional IRA to a Roth – for the 2022 tax year – when do I pay the tax? For example, if I’m in the 24% tax bracket, do I have to pay $24,000 immediately or can I make estimated quarterly payments of $6,000 each?

— wanting to do well

A. The tax liability on a Roth Conversion is one of the most important considerations before you get started.

Where will this tax payment come from?

You want to make sure you have enough assets outside of the IRA to pay the resulting taxes, said Cynthia Fusillo, a certified public accountant at Peapack Private Wealth Management in New Providence.

“Your plan conversion, although it is due at the beginning of the year, this does not necessarily mean that the resulting tax debt must be paid at the same time,” she said. “Converting earlier in the year can give you more time to pay taxes because, generally, taxes are due when you file your tax return for that year.”

Your 2022 tax return is due April 15, 2023, so potentially you could delay the payment of the conversion tax in whole or in part up to that time.

As you noted, some taxpayers are required to file quarterly returns estimated tax payments, Fusillo said.

“Generally, it is necessary when you have sufficiently substantial sources of income that are not covered by withholding tax,” she said. “Some examples would be investment income, self-employment income, and rental income, to name a few.”

Also there are two methods to base the calculation of your estimated payments on and avoid a penalty for underpaying estimated tax, she said.

First of all, you can pay securely.

This means you must cover 100% of your previous year’s tax payable for the current year – 150% if your adjusted gross income exceeds $150,000 – in order to avoid the underpayment penalty. she declared.

“It’s a popular method and works well when your income tends to be consistent,” Fusillo said. “It is easy to calculate and requires no guesswork. Your four quarterly payments will be the same amount.

The other method is to cover 90% of your expected tax liability for the current year – it’s 80% for New Jersey.

“It works well if you have a sudden drop in income, not consistent with the previous year, but still need to make quarterly payments,” she said. “This requires you to forecast your income and calculate the resulting tax on a quarterly basis, and each estimated payment may change as your forecast changes.”

Now to answer your specific question.

If you are already used to making quarterly payments estimated payments, then you will continue to do so, said Fusillo.

Your Roth conversion will mean that your projected income for 2022 is likely higher than it will be in 2021. Therefore, you will more than likely use the safe harbor method and cover your 2021 tax debts – at 100 or 110 % again according to your adjusted gross income. income — in your estimated quarterly payments for 2022, she said.

“Any additional taxes due as a result of your 2022 Roth conversion would be due April 15, 2023,” she said. “If, however, your 2022 income is not much higher than it is in 2021, you can use the 90% method and estimate your payments that way.”

You should consult a tax advisor who can explain how the rules affect your particular situation.

Send your questions to [email protected].

Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.comit’s weekly e-newsletter.


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