The Internal Revenue Service (IRS) requires quarterly estimated tax payments to be filed by those who have income that is not subject to automatic withholding. We tend to think of small business owners and independent contractors, but they are NOT the only ones. We are not going to get into the calculations for estimated payments here (too much information), but estimated payments are typically calculated using previous year’s income that was not subject to automatic withholding.

Sticking to our theme, there is also a chance that you will need to make an estimated tax payment if you complete an “Ideal Roth Conversion.” For example, if you convert $100,000 from your Traditional IRA to your Roth IRA in October this year (4^th quarter) and shift 100% of that conversion into your Roth IRA without withholding, you will want to send in your estimated taxes to the Fed and your state (if applicable). You will also need to file a couple of forms, as we have mentioned before, to let the IRS know what you are doing so that they do not penalize you for not making estimated payments throughout the year. Form 2210 is the form that lets the IRS know that you do not want to be penalized.

How much should you be sending and how do you file these forms? We recommend that you work with your qualified tax advisor prior to doing any Roth conversions or making estimated tax payments. If you want to hit your target of +/- $1,000 on your tax refund, you should consider having your tax professional run your estimates quarterly. We work with our clients to analyze their tax returns in October, which gives us adequate time to work with tax professionals and execute the strategies that we recommend prior to the end of the calendar year.

Next up: Different Ways to DEFER Taxes – and Why Do We Bother?

Disclosures

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.