David McKnight looks at why many people wait until the fourth quarter to do a Roth conversion, the potential penalties, and what can be done to avoid having to pay underpayment penalties to the IRS.
David begins the episode by highlighting the fact that a lot of investors wait until Q4 before they do a Roth conversion – and they prefer to pay taxes on it in cash instead of simply having the taxes withheld by the IRS.
From a mathematical standpoint, it’s the correct thing to do because it allows you to get 100% of the converted dollars into your tax-free account.
However, if you didn’t pay quarterly taxes on that income evenly throughout the year, the IRS can charge you an underpayment penalty!
The IRS’ safe harbor rules can spare you from any underpayment penalty for a Q4 Roth conversion, if certain requirements are met…
David goes over two scenarios in which you wouldn’t have to pay an underpayment penalty, as well as when, and why, you may need to file Form 2210 A1.
Make sure to familiarize yourself with Form 2210 A1 because, as David puts it, it will “become your best friend if you’re hoping to avoid underpayment penalties on a fourth quarter Roth conversion.”
Mentioned in this episode:
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com
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