From 24/7 Wall St. · David Beren · · 1m 20s
Roth Conversion Penalty Explained
Roth conversion in December triggers IRS penalty for income that didn't exist yet. One form fixes it.
In brief
Roth conversion in December triggers IRS penalty for income that didn't exist yet. One form fixes it. File Schedule AI to erase underpayment penalty from phantom income Originally reported by 24/7 Wall St..
Phantom Income Penalty
The IRS charges a penalty for income that didn't exist yet, treating December income as if it existed in April.
Form 2210 Fixes It
Schedule AI on Form 2210 rewrites the calculation by tracking income through specific dates instead of quarters.
Why It Happens
Converting $120,000 in December requires paying tax in April, but the IRS assumes income existed in earlier quarters.
Tax Withholding Alternative
Withholding tax from a separate retirement distribution avoids the penalty by satisfying all quarterly installments.
Safe Harbor Option
Pay 90% of current year's tax or 100% of prior year's tax to avoid the penalty without annualization.
Penalty Waiver
The IRS waives the penalty for retirees who reached age 62 or became disabled during the tax year.
Timing Matters
Converting in December creates the hardest penalty situation, but converting in early quarters avoids it entirely.
Form 2210 Requirements
Schedule AI must be filed with the return and requires detailed income records by period to work.
The main idea
File Schedule AI to erase underpayment penalty from phantom income
