What are the estimated tax penalties on Roth IRA conversions?
Some risk attaches to the long-range tax-saving move of converting your regular (“traditional”) IRA to a Roth IRA. In a traditional IRA, funds grow tax-free but are taxable when withdrawn. Roth IRA funds get tax-free growth and are tax-free when withdrawn, but with a tax cost up front: Roth IRA contributions are never tax-deductible (as traditional IRA contributions often are) and conversions of traditional IRAs to Roth IRAs are always taxable. Conversions, at a tax cost today, are done so that todays funds when withdrawn, and all future appreciation when withdrawn, will be tax-free. IRS is finding that some taxpayers making the conversion have failed to take the resulting conversion income into account in their estimated tax calculations. This has led to unexpected tax penalties. Example: Jane has a salary of $70,000 a year. Her tax on this, after allowable deductions, is covered by wage withholding. But last year she converted her $150,000 traditional IRA to a Roth IRA. She knew this
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- What are the estimated tax penalties on Roth IRA conversions?
