09 Jan I convert funds to a Roth IRA every year. Can we talk taxes?

Q. For the past four years, I have been converting $150,000 per year from my traditional IRA to my ROTH IRA. The amount is calculated to prevent me from creeping into the 24% marginal bracket. I pay four equal estimated tax payments to the IRS and New Jersey. Until now, the Roth conversions have been more or less staggered throughout the four quarters of every year. I am confident that the S&P 500 will be making gains throughout 2024, and would like to convert at least $100,000 early in January. Can or should I pay quarterly taxes in proportion to what I take out, or must I continue to pay equal amounts per quarter over the course of the new year? I am 71 years old — no RMD factor — and I pay the tax from funds outside of the retirement accounts.
— Taxpayer

A. Many investors decide to convert funds from a traditional IRA to a Roth IRA, which allows the account to be tax-free forever.

As you noted, you have to pay tax on the conversion.

To avoid an underpayment of estimated tax penalty, a taxpayer can “annualize” their income over 3, 5 and 8 months preceding the April 15, June 15 and Sept. 15 due dates for the first three quarterly estimated tax payments, said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

“This is typically availed of when there is a sizable income event late in the year such as an unexpected capital gain, which absent annualization of income would result in an underpayment penalty being incurred,” he said. “The taxing authorities do not require taxpayers to be mind-readers as far as future income is concerned.”

Your situation is the opposite as you are anticipating a sizable income event in January in the first quarter.

Becourtney said it is unnecessary for you to accelerate your 2024 estimated tax payments.

“Based on your fact pattern, you will likely use the safe harbors in calculating your estimated tax payments – 110% of your 2023 federal tax liability and 100% of your 2023 New Jersey tax liability,” he said. “You should continue to make equal quarterly estimated tax payments as there is no reason to remit payments earlier than required to.”

Email your questions to .

This story was originally published in January 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.