Penalties for underpayment after Roth IRA conversion if you got a refund last year?

I'm trying to figure out if I'll get hit with an underpayment penalty this year. Long story short, I rolled over my traditional IRA to a Roth IRA, and I know I'm gonna owe a decent chunk in taxes because of it. I've been reading about the underpayment penalty rules and I found this: You may avoid the Underpayment of Estimated Tax by Individuals Penalty if: * Your filed tax return shows you owe less than $1,000 or * You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. Here's my confusion - I actually got a refund last year (for 2023 taxes). Does that help me with the "100% of the tax shown on the return for the prior year" part? I'm not sure how that applies when you got money back instead of owing. Do I still need to make estimated payments to avoid penalties? The conversion was pretty substantial so I'm definitely going to owe more than $1,000.

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20 comments

Zoe Papadakis

•8M

The "100% of tax shown on the return" refers to your total tax liability for the year, not how much you owed or got refunded at filing time. Your refund just means you overpaid throughout the year. Look at your 2023 Form 1040, line 24 - that shows your total tax. As long as your withholding and estimated payments for 2024 equal or exceed that amount, you'll meet the safe harbor provision and avoid the underpayment penalty. The Roth conversion creates taxable income, but if your withholding/payments for 2024 are at least 100% of your 2023 total tax (or 110% if your AGI was over $150,000), you won't face penalties regardless of how much extra you owe when you file.

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Jamal Carter

•8M

After dealing with a similar situation last year, I found taxr.ai really helpful for figuring out my potential tax liability and avoiding penalties. I converted about $65k from traditional to Roth and was worried about getting slammed with underpayment penalties. The tool at https://taxr.ai helped me calculate exactly how much I needed to have withheld to meet the safe harbor rules. It analyzed my previous year's return and projected my current year with the conversion income. Super straightforward compared to trying to figure it all out manually!

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Jamal Carter

•8M

It was within $200 of my actual tax bill, which I thought was pretty impressive considering all the variables with a Roth conversion. The projection helped me adjust my W-4 to increase withholding for the last few months of the year to hit the safe harbor amount. You don't need to connect it to your IRS account - you can upload your previous tax return PDF or enter the information manually. I just uploaded my return and it extracted all the relevant info automatically. They explain that they use encryption and don't store your documents after analysis.

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AstroAdventurer

•8M

Just wanted to follow up! I tried taxr.ai after seeing the recommendation here and it was incredibly helpful. I was really confused about how the Roth conversion would affect my tax situation, but the tool broke everything down clearly. It showed me that I needed to have about $9,700 withheld for the year to meet my safe harbor requirement based on last year's return. I was on track for only about $7,800 in withholding, so I submitted a new W-4 to my employer to increase withholding for the remaining paychecks this year. Crisis averted! The peace of mind was definitely worth it.

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Liam O'Sullivan

•8M

I had a similar Roth conversion issue and tried calling the IRS directly for clarification on the safe harbor rules. Was on hold for HOURS with no luck. Someone recommended Claimyr (https://claimyr.com) and it actually got me through to an IRS agent in about 20 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what others have said here - meeting 100% of prior year tax (or 110% for higher incomes) means no penalties regardless of how much the Roth conversion increases your tax bill. Such a relief to hear it directly from the IRS.

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Liam O'Sullivan

•8M

It uses an automated system that continually calls the IRS and navigates the initial menu options for you. When it finally gets through the queue, it calls your phone and connects you directly to the agent. You don't have to sit on hold for hours - you just get a call when an agent is available. I was skeptical too but it legitimately works. I think they use the same technology that customer service call centers use for callbacks. They don't ask for any tax info - just your phone number to call you when they get through.

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Giovanni Conti

•8M

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McKenzie Shade

•2M

This is such a common source of confusion! I went through the exact same thing when I did my Roth conversion two years ago. The key thing to remember is that getting a refund doesn't mean you didn't pay taxes - it just means you overpaid through withholding and estimated payments. For the safe harbor rule, you're looking at your actual tax liability (line 24 on Form 1040), not whether you owed additional money or got a refund when you filed. So if your 2023 total tax was $8,000 but you had $9,200 withheld from your paychecks, you got a $1,200 refund. But for 2024 safe harbor purposes, you'd need at least $8,000 in withholding/estimated payments to avoid penalties. One thing that helped me was adjusting my W-4 mid-year after doing the conversion to increase withholding for the remaining pay periods. Much easier than trying to calculate and make estimated quarterly payments!

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Ethan Davis

•2M

This is really helpful, thanks! I'm in a similar situation and was getting confused by all the different numbers on my tax return. So just to clarify - even if I do a large Roth conversion this year that pushes my tax liability way up, as long as my withholding meets that safe harbor threshold from last year's total tax, I won't get hit with underpayment penalties? That seems almost too good to be true but I'm seeing this confirmed by multiple people here. The W-4 adjustment idea is smart too. I was dreading having to figure out quarterly estimated payments but increasing withholding from my regular paycheck sounds much more straightforward.

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