Roth Conversion: Do I need estimated tax payments or can I use safe harbor rule?

Wait a sec - I thought the safe harbor was 110% of last year's tax liability if your AGI was over $150k? Is that not right? OP definitely seems to be in that category.

You're absolutely right, and I should have been more specific. For taxpayers with AGI over $150,000 (or $75,000 if married filing separately), the safe harbor is indeed 110% of the prior year's tax liability, not 100%. So in OP's case, they would need to reach 110% of $67k, which is $73,700 in withholding to qualify for the safe harbor protection. With only $40k projected in withholding, they're about $33,700 short of meeting that threshold.

Does it actually work with Roth conversions specifically? I've used tax calculators before but they never seem to handle conversions correctly - always makes me nervous.

How accurate was it? I'm planning a big conversion next year and I'm worried about screwing up my quarterly payments. Did the amounts it recommended actually match what you ended up owing?

It absolutely handles Roth conversions correctly - that was my main concern too. The system specifically asks about retirement account conversions and treats them properly for quarterly tax calculations. The accuracy was impressive. The amount I ended up owing on my return was within about $200 of what taxr.ai projected. For me, it recommended using the annualized income method since my conversion happened mid-year, and that ended up saving me from making unnecessarily large early quarterly payments. The IRS accepted everything without any issues.

This seems sketchy. How does a third-party service get you through to the IRS faster than calling directly? Sounds like they're just taking your money for something you could do yourself.

Does this actually work for complex questions like safe harbor rules with Roth conversions? I feel like most IRS agents I've spoken to in the past give very generic advice.

It's not sketchy at all - they use technology to navigate the IRS phone system and hold your place in line. When an agent is about to pick up, you get a call. It's completely legitimate and saves hours of holding time. For complex questions like Roth conversion safe harbor rules, it really depends on which agent you get. In my case, I was connected to someone in the tax law department who was very knowledgeable about estimated payments. They walked me through my specific situation with the Roth conversion and confirmed exactly how the 110% safe harbor would apply in my case. I've found that if you get a general agent who can't answer your question, they'll often transfer you to a specialist.

That's a really good point I hadn't considered at all. I'm in California which I know can be aggressive with tax collection. Do you know if they follow the same 110% safe harbor rule as the federal government?

California does follow the 110% safe harbor rule similar to the federal government, so you're in luck there. You'll need to make sure your state withholding and estimated payments reach 110% of your prior year CA tax liability. However, California differs in how they apply estimated payment requirements. They require 30% for Q1, 40% for Q2, 0% for Q3, and 30% for Q4 (instead of the federal 25% each quarter). So if you're making estimated payments rather than increasing withholding, the timing matters differently for CA compared to federal.

Ouch, that penalty hurts! Did you consider fighting it at all? I've heard the IRS sometimes waives the penalty for first-time issues.

I actually did try to request a waiver using Form 2210, but the IRS denied it since I didn't meet any of the specific waiver criteria (like casualty, disaster, or unusual circumstances). The underpayment was clearly due to poor planning on my part with the Roth conversion timing. The lesson learned is that for large conversions like this, it's worth paying a bit extra upfront through the safe harbor method rather than trying to optimize and risking penalties. That $2,200 penalty would have covered a lot of conservative overpayment that I could have gotten back as a refund.

This is really helpful advice, especially the part about maximizing withholding being better than estimated payments. I'm new to this community but dealing with a similar situation - just did a $150k Roth conversion myself and was stressing about the quarterly payment timing. Quick question though - when you say "contact payroll ASAP," how exactly do you increase withholding mid-year? Do you just update your W-4 to have additional tax withheld, or is there a specific form/process for this kind of situation?

You can increase withholding by submitting a new W-4 form to your payroll department. On the current 2024 W-4, you'd use line 4(c) "Extra withholding" to specify an additional dollar amount to be withheld from each paycheck. For example, if you need an extra $33,700 and have 10 paychecks remaining this year, you could request an additional $3,370 per paycheck. Some payroll systems also allow you to specify a flat dollar amount for the remainder of the year rather than per-paycheck. The key advantage is that even if all this extra withholding happens in Q4, the IRS treats it as if it was withheld evenly throughout the entire year for penalty calculation purposes. This is much more forgiving than estimated payments, which are tied to specific quarterly due dates. I'd recommend calling your HR/payroll department directly since many can process W-4 changes quickly, especially when you explain it's for a large tax obligation. Some companies can even implement the change for your very next paycheck.

This is excellent professional advice! I'm dealing with my first major Roth conversion and the spouse withholding point is particularly helpful - I hadn't realized that withholding from either spouse counts toward the joint safe harbor requirement. One follow-up question: you mentioned the annualized income installment method as a potential alternative. For someone like the OP with an August conversion date, roughly how much could this method potentially save compared to the safe harbor approach? I'm trying to decide if it's worth the added complexity for my own situation (I did a $200k conversion in September). I'm definitely leaning toward the safe harbor route after reading about everyone's experiences with penalties, but curious about the potential savings if the calculations work out favorably.

Great question about the potential savings with the annualized income method! For someone with a September conversion like yours, the savings could be more significant than the OP's August timing. With the annualized method, you'd only need to make estimated payments based on the income actually received in each quarter. So for Q1 and Q2, you'd pay based on just your regular income (much lower payments), then catch up in Q3 and Q4 when the conversion income is factored in. For a $200k conversion in September, you might save $1,500-3,000 in opportunity cost compared to safe harbor, since you'd avoid overpaying early in the year. However, the calculations are complex and mistakes can be costly - I've seen people mess up the annualized worksheets and end up with penalties anyway. Given that you're new to major conversions, I'd honestly recommend sticking with safe harbor for this year. The peace of mind is worth more than the potential savings, especially since any overpayment just becomes a refund next year. Once you get comfortable with the process, you could consider the annualized method for future conversions. If you do want to explore it, definitely use tax software or consult a professional rather than trying to calculate it manually with Form 2210.

That's such a practical tip about calling the benefits hotline! I'm relatively new to navigating complex tax situations like this, and it's reassuring to hear that HR departments are usually equipped to help with these calculations. I've been putting off dealing with my own Roth conversion tax planning because the math seemed so intimidating, but your experience makes it sound much more manageable. Did they also help you understand how the timing would work - like when the increased withholding would actually start showing up in your paychecks? I'm definitely taking your advice about prioritizing peace of mind over optimization. As a newcomer to this level of tax complexity, the safe harbor approach seems like the smart way to go rather than risking penalties while trying to get fancy with the calculations.

@Grace Thomas Yes, they were really helpful with the timing details too! They explained that the increased withholding would start with my next paycheck after submitting the updated W-4, and they even walked me through how to calculate if I had enough remaining paychecks to hit my target. In my case, I needed about $28k in additional withholding and had 12 paychecks left, so we set it up for an extra $2,400 per paycheck. They also mentioned that if I ended up with a big refund next year, I could always adjust my 2025 W-4 to reduce withholding. What really put me at ease was when they confirmed that even though all this extra withholding would happen in the last few months of the year, the IRS treats it as if it was spread evenly across all 12 months for penalty purposes. That s'the key advantage over estimated payments where timing really matters. Honestly, after going through this process, I d'recommend the safe harbor route to anyone doing their first major Roth conversion. You can always get more sophisticated with future conversions once you understand how everything works!