Best Way to Pay Taxes on My $110k Roth IRA Conversion?

Wait, so are you saying if they increase withholding from their remaining paychecks, the IRS treats that as if they had been withholding at that higher rate since January? Even though the Roth conversion happened in Q3? That seems like an odd loophole.

Yes, that's exactly right! It's a well-known quirk in the tax code. The IRS treats withholding as if it occurred evenly throughout the year, regardless of when it actually happened. So increasing your withholding in the last few months of the year can help you avoid underpayment penalties even for events that happened earlier. This is different from estimated payments, which are strictly tied to the quarter in which they're made. It's not really a loophole - just how the rules are written, and the IRS acknowledges this difference in treatment.

How does it work with Roth conversion specifically? Does it actually tell you whether to do estimated payments or withholding? My accountant charges me $200 an hour and I'm trying to figure out if this is worth it.

I'm skeptical about AI tax tools. How accurate is it compared to a human accountant? I've been burned before by tax software that missed important details.

It analyzes your specific Roth conversion situation and compares the estimated payment vs. withholding approaches, showing you the impact of each. It clearly explained to me how withholding is treated as occurring throughout the year, which made my decision easy. Regarding accuracy, I was skeptical too, but it references specific IRS publications and tax code sections with its advice. I verified several recommendations with actual IRS guidelines and they matched perfectly. Unlike general tax software, it's specifically designed for analyzing documents and special situations like Roth conversions.

How does this actually work? I thought it was impossible to get through to the IRS these days. Are they somehow jumping the queue or something?

This sounds like BS honestly. I've tried everything to get through to the IRS and nothing works. If this actually worked everyone would be using it and the IRS would shut it down.

It uses an automated system that continually redials the IRS using their published numbers, navigates the phone tree, and then calls you when it gets a human on the line. It's all above-board and uses the regular IRS phone lines - they're just handling the tedious redial process that most of us give up on. Regarding your skepticism, I completely understand because I felt exactly the same way. I figured it was either a scam or wouldn't work. But it really did get me through to an IRS representative who answered my specific questions about handling my Roth conversion taxes. They don't have any special access - they're just persistent with technology where humans give up.

Do you know what those safe harbor percentages are? I know there's something about paying 100% or 110% of last year's tax liability, but I'm fuzzy on the details.

The safe harbor rules require you to pay either 90% of your current year tax liability OR 100% of your prior year's tax liability (110% if your AGI was over $150,000) through a combination of withholding and estimated payments. For most people with a large one-time event like a Roth conversion, the 100%/110% of prior year method is usually easier since you know exactly what that number is. Check your 2024 return to see your total tax, then make sure your total payments for 2025 hit the required percentage.

Good point! I live in California and they're super strict about estimated payments. They don't follow the federal rule about withholding being treated as paid throughout the year. I had to make sure I made my state estimated payment for the quarter my conversion happened or face penalties.

This is so true! I did a partial conversion during the market dip in 2020 and that timing worked out amazingly well. Paid taxes on the lower value and then enjoyed the recovery completely tax-free. Worth considering market conditions when planning conversions.

This is really helpful! I'm in a similar situation and was worried about the complexity of calculating how much extra to withhold. When you say $24k-$30k for a $110k conversion, are you assuming around a 22-27% effective rate on that conversion amount? I'm trying to figure out if I should use my marginal rate or something lower since this might push me into a higher bracket. Also, did you run into any issues with your employer when you dramatically increased your withholding mid-year?

You're right to think about marginal vs effective rates! For the conversion amount, you definitely want to use your marginal tax rate since that $110k gets added on top of your existing income. So if you're already in the 24% federal bracket, the entire conversion gets taxed at 24% (or higher if it pushes you into the next bracket). My estimate assumed around 22% federal plus state taxes, but you'll need to calculate based on your specific situation. Don't forget about potential Medicare surtax if the conversion pushes your MAGI over the thresholds ($200k single, $250k married filing jointly). Regarding employer issues - most payroll systems can handle large withholding increases without problems. I just updated my W-4 online and it took effect with the next paycheck. The only thing to watch out for is making sure you don't withhold more than your actual pay! If you need to withhold a huge amount relative to your remaining paychecks, that's when the combination approach becomes necessary.