I'm semi-retired with no earned income in 2009. I want to use my 15% bracket to make a Roth conversion. I'm wondering how most gracefully to handle taxes. One option is to convert the entire (let's say $20,000) with no withholding; this means I will owe an add'l $3K in income tax when I file my return. I have heard rumor that underpayment penalty does not apply to taxes owed on a Roth conversion; is this true ? If not, I will want to send in an estimated tax payment for the $3K; then, since I am doing no other regularly-scheduled estimated-tax payments, I will need to fill in a form (2210 ?) indicating that the $3K was not due until when I paid it (sometime in Nov or Dec). How big a pain is this form (for a TurboTax filer) ?
I have heard recommendation of another method, where by I DO have the $3K withheld from the conversion, and then I replace it later with after-tax funds, being sure to tell the broker to code it as a "conversion contribution" rather than a "regular contribution". That way, there's no issue of underpayment penalty, plus no issue of owing a 10% penalty on the $3K (I am under 59yo). But I asked broker about this, and they did not seem to understand, making me worried that they would code it correctly.