05 Mar How should I pay tax on Roth IRA conversion?

Q. I have a question about when taxes have to be paid on a Roth conversion. I already make estimated tax payments so I will continue to do that. I’ve read that taxes on a conversion either in a lump payment or via estimated payments. How should I do this?
— Unsure

A. Roth conversions will in most cases cause a taxable event.

You pay the taxes now, but then you have an account that will give you tax-free withdrawals in the future.

If you’re already paying estimated taxes, then a Roth contribution will increase the amount of ordinary income realized in a given year, said Evan Drury, a chartered financial consultant with U.S. Financial Services in Fairfield.

“This means that your estimated payments will have to be adjusted for the increase in income for the year relative to a year where you had not converted traditional retirement funds to Roth,” Drury said.

The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

You should take all this information to your tax preparer so you can calculate your estimated tax burden while considering your overall tax return and the timing of your Roth conversion, he said.

“Have a plan outlined early so that you are prepared and can make adjustments throughout the year,” he said.

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This story was originally published in March 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.