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Do a Roth conversion in November or December and you’ve made a smart move in a low-income year. You’ve also just bought yourself a tax problem.
The IRS wants its money as you go, not in one lump next April. And for estimated payments, it grades you quarter by quarter. Say you convert $100,000 in December and the conversion generates a tax bill in the low $20,000s. Pay it all with a single January estimated payment and you might think you’re square. You’re not. The IRS looks back and sees that it wanted roughly $5,500 in each of the four quarters, and the first three came up empty. That’s an underpayment penalty waiting to happen.
The fix isn’t another estimated payment. It’s withholding, and one rule makes it work.
Tax withheld is treated as paid evenly across all four quarters, no matter when you actually take it out. A single withholding event in December is spread back over the whole year in the IRS’s eyes. An estimated payment in December counts only for the quarter you make it.
That asymmetry is the whole game. So if you’re planning a fourth-quarter conversion, cover the tax through withholding, not a January check. A few clean levers:
One caution that trips people up: don’t withhold the tax from the Roth conversion itself. That money never reaches the Roth, and if you’re under 59½ it counts as a distribution and can trigger the 10% penalty. Convert the full amount. Source the tax from somewhere else.
One more thing worth knowing. If you’ve already paid in (through withholding plus timely estimates) at least 90% of this year’s tax, or 100% of last year’s, you’re in the safe harbor and owe no penalty regardless of timing. (The 100% rises to 110% if your prior-year AGI topped $150,000.) But a large Q4 conversion can blow past that cushion fast, which is exactly when the withholding trick earns its keep.
The broader payoff is peace of mind. Withholding lets you make a big fourth-quarter move without reconstructing your income quarter by quarter next April. You pay the same total tax. You just skip the penalty math and the Form 2210 headache.
Plan the conversion in the fourth quarter. Plan the withholding right alongside it.
I asked Gemini to develop a strategy for a large 4th quarter roth conversion and desire to treat taxes as a withholding and to take taxes from a brokerage account. After some back and forth arrived at the following. I would be interested if the tax gurus on HD see any fatal flaws?
There is one unique loophole if you absolutely want the payment to be classified by the IRS as a withholding rather than an estimated payment.
The IRS treats all retirement account tax withholdings as if they were paid evenly throughout the entire year, regardless of the actual date the withholding took place.
If you want to exploit this rule to completely bypass the need for filing Form 2210 Schedule AI at tax time, you can do a two-part transaction using both your retirement and brokerage accounts:
1. The Pure Conversion: Convert the desired amount from your Traditional IRA to your Roth IRA, selecting 0% withholding so the entire balance moves safely into the Roth.
2. The Tax-Withholding Distribution: Take a separate, deliberate distribution from your Traditional IRA directly to the IRS as a 100% tax withholding to cover the tax bill.
3. The Brokerage Backfill: Immediately use cash from your Schwab brokerage account to execute a 60-day rollover contribution to your Roth IRA to replace the amount you just distributed for taxes from your traditional IRA.
Why this works:
Because the IRS views the tax withheld in Step 2 as having been paid equally across Q1, Q2, Q3, and Q4, it automatically erases any underpayment penalties for the earlier quarters. By backfilling the Roth IRA with cash from your brokerage account within 60 days, you ensure that the total money distributed from your traditional IRA is converted to your Roth IRA, taxes are a withholding and in effect funded from your brokerage account.
Warning on the Loophole: You are only allowed one 60-day indirect rollover per 12-month period. If you have already executed an indirect rollover recently, you cannot use this method.
Grant – Thanks for the reply. If I understand your process correctly, my observation would be: The Step 2 distribution came out of a Traditional IRA. Roll it back into a Traditional within 60 days with brokerage cash and it’s a tax-free wash. Roll it into the Roth instead and it’s a Roth conversion, fully taxable, because you’ve moved Traditional money into a Roth.
So the “tax money” doesn’t pay the tax. It becomes an extra conversion equal to the tax, which means a $100,000 conversion you thought you did is actually $130,000.
And that overshoot is the whole risk: if you sized the $100k to stay under a bracket or IRMAA threshold, the real $130k blows through it.
Agree IRMAA threshold is a careful consideration, as is taking distributions before 59.5 yrs of age which will under most circumstances also incur penalties.
The above comment was purely addressing the tax penalty situation associated with a large end of year conversion and treating tax payment on the Roth conversion as a witholding, rather than incurring a penalty for underpayment if estimated taxes were paid instead and not reported correctly to the IRS.
The multi step process illustrated pays taxes from a brokerage account which is widely regarded as more tax efficient than paying from an IRA when performing the conversion.
When performing Roth conversions the impact on gross income and IRMAA premiums from the age 63 onwards as you mentioned are an important consideration. One dollar too much can move you up a bracket and be quite costly.
No matter whether the tax is paid from brokerage or from the IRA the amount of tax paid dollar for dollar is the same. Paying taxes from brokerage allows more to be transferred into the Roth ‘tax free’ envelope.
John:
I didn’t see any comments regarding prior years’ tax due equaling ZERO…because you received a refund? 100% of Zero is Zero.
Comment please?
Mike – Great question. Getting a refund doesn’t make your prior-year tax zero. The prior-year safe harbor keys off the total tax on your return — the total-tax line — not the balance you owed or the refund you got. If you had, say, $18,000 of total tax but $20,000 was withheld, you got a $2,000 refund, but your prior-year “tax” for safe-harbor purposes is still $18,000, not zero.
There is a real zero exception, but it’s narrower than a refund: if your actual total tax last year was truly zero — no liability at all — and you were a U.S. citizen or resident for the whole year and the year covered 12 months, then there’s no underpayment penalty this year, period. 100% of zero is zero, exactly as you say. – John
John, thanks for an informative and useful article. Transitioning from a W-2 word with taxes withheld is a challenge for many retirees. I’ve seen this many times preparing voluntary tax returns for AARP. Unfortunately, by the time we get to help folks it may be too late to take advantage of your suggestions.
Rick – Thank you, and that’s a valuable view from your AARP work. It’s really wonderful that you do volunteer work for folks that need your help!. Best – John
I used the withdrawal withholding method late Dec 2025, withholding 96% fed tax from a 401k @ Fidelity (& no state tax applicable). While not meeting the prior year or 90% current year safe harbors the fed tax balance due was less than $1,000. And with this withholding spread evenly throughout the year the balance due was penalty free.
luigi767 – Nice real-world confirmation. Thank you for adding your experience to the discussion – John
Thanks for the tip. I had no idea the IRS did this.
If you generate nearly all of the income in the last quarter of the year, you may be able to pay your tax in January without a penalty but you’ll really need to know what you’re doing with Form 2210. The safest way to pay your taxes is through withholding but that’s not always practical; equal payments throughout the year using safe harbor amounts is safer but you are paying “early”; if you do try to bunch everything in the fourth quarter, I’d definitely recommend speaking with your CPA about the tax ramifications and Form 2210 since it’s a very intimidating form (but it can be workable).
For the past several years I have made quarterly withdrawls for slightly more than our tax liability from an inherited IRA, for more than the RMD of the deceased, and 100% going to the IRS. This account will run dry this year so will have to consider a new tactic next year.
PS a comment from Michael1 I read after posting this is to use 100% of my small pension to cover the bulk of my tax liability.
THIS IS WHY HUMBLE DOLLAR IS SO GREAT!
Jeffrey – well put, and I agree with all of it. Withholding is the safe, low-effort route; equal estimated installments against a safe-harbor target are next; and bunching into Q4 works but really does mean getting comfortable with Form 2210 and Schedule AI. For anyone going the annualizing route, your advice to loop in a CPA is exactly right — it’s workable, but it’s not a form to meet for the first time under an April deadline. Thank you for adding this. – John
John, just to be clear for everyone, I think by “bunching into Q4” you mean a large Q4 estimated payment. Whereas a large withholding in Q4 is treated as being withheld throughout the year, no extra form needed. Again, great article.
You are correct. You can make equal quarterly payments, or you can make payments in each quarter based on how much income you received in that quarter.
So, I’m sorry to have to say, the article is wrong. Many people don’t read the full IRS publication that applies to what they’re doing. Hidden down at the bottom of the instructions for Form 2210 is how to fill schedule AI, showing how much income you had in each quarter. After you have done your AI, you copy the results onto Line 10 of Part III of your 2210.
Ormode – you’re right that annualizing on Schedule AI is a legitimate way to handle a Q4-loaded year, and I could have been clearer that the “pay in January and you’re not square” line describes the default equal-installment method, not the only option. If your income genuinely lands in Q4, Schedule AI lets you show that, and a timely Q4 estimated payment can avoid the penalty.
The reason I steered toward withholding is exactly the Form 2210 and Schedule AI work you’re describing. Withholding is treated as paid evenly across the year automatically, so it gets you the same result without annualizing and without reconstructing income quarter by quarter. Two valid paths — I was recommending the one that skips the paperwork, not saying the other doesn’t exist. I do appreciate you making this clearer. – John
Note, I take my $100,000 RMD in Nov and pay the IRS and State of MO taxes via Vanguard at time of RMD, never had any issues about timing any taxes.
Thanks for the thought provoking article.
Regarding this : ” Convert the full amount. Source the tax from somewhere else.”
How does one source from a different account while doing withholding?
Doesn’t the definition of withholding mean that the tax amount is withheld from the same funds that are being converted?
Thank you
The withholding can be from anywhere. One might have income from a pension, part time work, social security, dividends, capital gains (both distributed from funds and realized through sales), and Roth conversions. The withholding from any or a combination of these at any time during the year counts as being withheld through the year and applies to the overall tax obligation.
Thanks!
I will pay the Roth conversion taxes quarterly or in the conversion quarter with form 2210 (Annualization)
Thank You for the post!
Excellent post. Will definitely use for future planning.
Thank you!
John, thanks for another great article.
One question: Towards the end, in the paragraph about the safe harbor, after explaining it, you say:
“But a large Q4 conversion can blow past that cushion fast, which is exactly when the withholding trick earns its keep.”
Can you please clarify? I thought the safe harbor was exactly that—if your estimates have totaled at least that amount, it doesn’t matter if you have a large chunk of additional income—you still avoid the penalty. So how do you “blow past that cushion fast”?
Andrew, you and DrLefty have it right. Good catch on the wording.
There are two safe harbors, and the sentence you flagged only holds for one of them.
The prior-year safe harbor is a fixed target: 100% of last year’s tax, or 110% if your prior-year AGI was over $150,000. That number is set the moment last year’s return is filed. A big Q4 conversion does nothing to it. If you are covering that target, you are penalty-proof no matter how much income you add this year. You may owe a large balance in April, but no penalty.
The current-year safe harbor is the one that moves. It is 90% of this year’s tax. A large Q4 conversion raises this year’s tax, which raises the 90% target, which is the cushion I was describing getting eaten into. So the withholding trick earns its keep for someone leaning on the current-year test, or someone who does not have a clean prior-year figure to point to (first year of retirement, prior-year income much lower, that kind of thing).
I should have named which safe harbor I meant in that line. Most people in the conversion-planning situation are best served by the prior-year target precisely because it is immune to the spike. Thanks for asking for the clarification. – John
Thanks! I’ve been doing a bit of digging into this myself because our tax situation is more complicated this year. We’re not doing Roth conversions but will be withdrawing some funds from an IRA to help pay for renovations. I’ve been trying to figure out the most efficient way to pay the taxes on that, and after some calculations, decided that the 2025 safe harbor number is the way to go. We know that number, and it makes all the 2026 complexity less relevant.
John, I appreciate your response and clarification. Your articles have been very helpful and I hope you keep at it.
If you’re using last year’s number for safe harbor, it shouldn’t matter at all. Last year’s number is already set. But if you’re using this year’s number and you add a big chunk of income in Q4, you need to make sure you have enough withholding for this year to get to that 90% safe harbor amount. At least I think that’s what it means(?).
Yep, I think you must be right on that. I’ve always used last year’s number so haven’t worried about it.
Thanks, John. I appreciate your contribution to the site.
This is a great article. I didn’t realize a 4Q taxable event impacted the required estimated payments for the previous quarters.
We have some ongoing withholding through the year, then when we get to 4Q we up it enough to cover either our expected tax liability or the safe harbor number.
Thank you!