how best to handle taxes on a Roth conversion

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.

Reply to
JGE
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I find the 2210 schedule AI to be annoying, but have done enough so it's one more durn form. If you've never done one, it is possible to misunderstand the instructions, but is otherwise more or less straightforward.

If your Roth IRA that is receiving the conversion is with the same custodian, the custodian should be asked to handle this conversion directly and then should not code it as an early distribution.

I don't think the custodian being asked to withhold federal tax and you coming up with the rest of the conversion money will result in a full report of no early distribution.

Reply to
Arthur Kamlet

Is there any truth to a rumor I heard that taxes due on a Roth conversion are not subject to underpaymetn penalties ?

Reply to
JGE

No.

What you might have heard is: if you do a Roth conversion in 2010, the income is recognized half in 2011 and half in 2012 (unless you elect to recognize all of it in 2010). So a conversion to a Roth in 2010 does not result in any taxble income or tax in 2010.

If filing MFJ each spouse can independently make the election to recognize conversion income in 2010.

Reply to
Arthur Kamlet

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