Incredible IRA 'HACK' For Paying Roth Conversion Taxes

Tax planning and making proper tax payments can be one of the most confusing parts of retirement.

The IRS lays out convoluted rules that are difficult to understand, and the responsibility is on you to follow these rules.

A confusing aspect of retirement taxation is adhering to IRS guidelines for making tax payments on Roth Conversions and other taxable events.

In this video today, we are going to explain two critical types of tax payments:
1. Tax Withholdings
2. Estimated Tax Payments

We will show that these tax payments are treated differently in the eyes of the IRS and which payment you should make for your situation.

This video will also explain a powerful IRA Tax Hack that you can use as a sort of "get out of jail free" card if you find yourself in a situation where you messed up making your required tax payments.

0:00 Early Year Roth Conversion Tax Requirements
0:26 The IRS "Pay As You Go" System
0:58 When Must You Pay Taxes on a Roth Conversion?
1:10 Not All Tax Payments are Created Equal
2:36 The Optimal Way to Pay Roth Conversion Taxes
3:42 Using Form 2210 To Avoid a Tax Penalty
4:39 An Incredible IRA Hack For Paying Roth Conversion Taxes
6:22 Don't Be Afraid of Early Year Conversions!

#IRAHack #RothConversion #TaxPlanning
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Always remember, "You Don't Need More Money; You Need a Better Plan"

[ladylyonteeth]

Oh no. My head hurts. 😩 I’ll have to watch again.

[gellopudding]

Excellent explanation of all of the topics you covered, and superb strategy for avoiding an underpayment penalty. I subscribed to your channel. Thank you!

[jjf]

Wow I was watching another video & they never mentioned the 2210 form. Thanks for another great video.

[joan]

Excellent and concise video! Exactly what I needed as I complete Roth conversion. Also, cleared up my tax confusion regarding my Roth conversion of last year. Thank you, Eric!

[mr.j]

Great info: A safety net in case I mess up next year. (I'll make sure to pay quarterly, but it is nice to know I have options).

[p]

Love your videos, could you do one on Net Investment Income Tax and Roth Conversions

[annamartino]

Dear Eric, thank you for this Excellent Hack! But could you please make a video when someone is getting a SSDI LUMP SUM for 5-7 years and does periodically convert from Rollover to ROTH IRA throughout the same year. What should they do to avoid Tax Penalties on the SSDI Lump Sum and how to estimate Rollover to ROTH conversions amount as to avoid IRMAA Tax SURCHARGES for MEDICARE Premiums plus any software you would recommend for Disabled Retirees who can't work past 58 due to Health?

[tedphillips]

I have never had penalties on a 100k conversion done in say april but paid evenly in quarterly estimates.

[deadcityhauntedhouse]

Thank you for the IRA rollover info. I had a capital gain sale earlier in the year and didn't understand the estimated tax rule. I performed a 100% withholding at the end of Dec and then filled the IRA back up a day later.

[tlar]

Can you do 2 video explaining the following in more detail.

At 3:25, what is the difference between the 20k tax and the four 5k tax payment? What changed.

At 5:25, what is happening in the flow chart?

[BW-kvwj]

On the 1099 R you showed at 3:52, it shows $16, 600 withheld out of that distribution for Federal Tax. If the IRS deducted $16, 600 why would you pay quarterly tax payments again?

[Jl-]

Thanks for the video! To make sure I understand the part of the hack about the 60-day rollover: Are you saying that this 60-day rule can be applied to the same IRA account? Is this really considered a rollover if you are taking a distribution from an IRA and then you put the money back in the same IRA?
Would this also get rid of the 10% IRA distribution penalty on the withheld amount if you are under 59.5?
Last question: Can this also be done for a large Roth conversion at year end if you didn’t make quarterly estimated payments throughout the year for that conversion in December? Would the money rolled over need to back in the IRA by Dec 31st of that year?
Thanks very much in advance!

[FNcHNg]

So it sounds like you could do conversions at any time during the year and be OK (no penalties) if you made the correct quarterly estimated tax payments. (a) one lump sum early/January, or (b) one lump sum late/December, or (c) several during the year. As long as you make correct amount quarterly estimated tax payments on your total annual income (conversions plus everything else) = pay estimated tax of 1/4 of your total annual tax every 3 months, then you wouldn't suffer any penalties. Or does this violate "pay as you go"? Thanks...

[nguyenguy]

Does this apply with doing a Roth conversion ladder? The info out there for FIRE is that you would pay taxes when you file taxes the following year.

[craigfugit]

For a Roth Conversion that is performed on June 1st is the entire tax due as part of the September 15th Estimated Quarterly Tax Payment or can it be split 50/50 between the September 15th and January 15th (of next year) Estimated Quarterly Tax Payments?

[carlam]

The IRS requires that RMD be taken BEFORE any Roth conversion so you may not do a Roth conversion early in the year and then do the RMD with withholding later in the year. You are also not allowed to take the RMD and then later put it back into the IRA. If you know what your estimated taxes will be, you can certainly do the RMD with withholding and then do the Roth conversion. In 2023 I did an early RMD and used the cash to pay off a loan, did a sizable Roth conversion and then in December did another IRA distribution for which almost all was withholding to pay taxes that would be due for 2023. A quirk in this transaction was that my broker required that some minimal percentage (1%) of the distribution had to be cash taken and not withholding.

[miketracy]

Another simple process is to withhold 20% with every distribution from taxable IRAs.

[seeking]

We're about to get a huge IRA conversion "benefit" for anyone with stocks or stock funds in their IRA if the markets keep falling.

[nja]

if you do a large Roth conversion early in the year and make an estimated tax payment sufficient to meet the 110% Safe Harbor Rule, does that eliminate any possibility of a tax penalty since you've paid 110% of the previous years taxes?

[amerlin]

Regarding 60-day Rollover rules. Suppose I realize late in year my quarterly estimated tax payments will be insufficient.
I arrange a 40k IRA distribution with 75% tax withholding. I assume I may rollover just the 10k I received back into an IRA.
Can I deposit the $10, 000 into the same IRA it came from?
Will my 1095 show a 30k distribution, or 40k and additional forms will need to be filled out at tax time?
Thanks for any help. I'll may to check the max % withholding Vanguard accommodates. 100%?