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Financial Planning / Tax Strategies
|Subject: Re: Implications/penalties of converting to Roth||Date: 1/3/2013 5:21 PM|
|Author: TMFPMarti||Number: 117283 of 122846|
I was unemployed for all of 2012 and my only source of income was my unemployment insurance, so at the very end of December, I decided to convert all of my pre-tax holdings (one traditional IRA and two 401Ks) into my Roth IRA while I was in a lower tax bracket.
I assume you have non-IRA cash available to pay the resulting tax liability. If you pay from your retirement funds, assuming you're under 59 1/2, or don't pay in full you'll incur penalties that will make the pittance you're worried about look like a walk in the park.
Although I understand that the converted amounts will count as ordinary income for 2012, I hadn't taken into consideration the "pay-as-you-go" aspect of our tax system, and so now I have a large unpaid tax liability that from what I understand will need to be covered by January 15th in order to avoid penalties come tax time. I was wondering what kind of options I have, both in terms of possibly not paying the liability until April 15th, and in terms of how I'm supposed to pay for it if I must do it before April 15th to avoid the penalty.
To pay before you file your return use Form 1040-ES. Form 2210 shows you how to calculate the penalty. Since most of your income came late in the year you would probably pay a lower penalty by using the annualized income method explained in Pub 505. Note that if you paid nothing at all in advance, including no withholding, the penalty would be 2% of your tax.
Also, from what I understand, the penalty is incurred based on the period when the liability is created, but I wasn't sure on the fine details of this. If I made the conversions at the very end of Dec, does my penalty accrue starting from the conversion date or does it accrue from the beginning of the period (Sept 1), and will it continue to accrue after Dec 31 until I pay it off?
The estimated tax penalty is calculated from the due date of the ES payment until the date paid or April 15, whichever is later. See Pub 505.
Also, is there a way to check how much tax I've had withheld so far from the IRS? I always opted for 10% to be withheld from my unemployment checks but I just wanted to make sure.
This is why I always tell people to keep things like check stubs, which I assume you didn't. The IRS can't tell you because they don't know yet. Maybe the agency that paid you can.
I was also wondering what the easiest way to calculate my estimated total liability would be.
I would think that all the software providers have demo copies of their 2012 software available for free preview. I know www.taxact.com does
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