Roth IRA Estimated Tax & Penalties

[Guest chrisrafter]

Hi all, this is a topic I've not seen covered very much at all, but it is a big issue as us '98 Roth-converters-and-4-year-income-spreader-outers get ready for 1999's filing.

Based on my conversion, I've got about a $5,000 extra tax liability for 1998, 99, 00 and 01.

# 1 question, is there anything easy I can do to reduce this tax burden? I paid it all in 98.

On penalties, 98 was no problem because I used that first year exemption, so I didn't have any penalty on the amount underwithheld, but I'm trying to figure for 99. Obviously, I can either increase my job withholding or pay estimated tax so that I come in within $1,000 of what I finally owe. The question I have is, I've been looking at the penalty paperwork, Form 2210, and it APPEARs that the government penalty is a mere 5.04% of the amount underpaid. Is this correct? If it is, it greatly changes my strategy, 5% is not very much at all, and I would be inclined to pay the penalty and invest the money at 8 or 10% and pocket the difference. Anyone have any experience here? Anything I'm missing? I'm planning to pay the tax amount on time in 2000, by 4/15.

Here's the other stupid question: It's almost a question about an omission, but here goes. If I want the use of that $5,000 for most of the year, what's to stop me from increasing my w-4 employer withholding during the latter part of the year, I'm talking big amounts out of every paycheck, like $1,000, so that I meet the withholding requirement? 1040 doesn't make any distinction about the timing of w-4 withholding, it doesn't require that it be made ratably though the year, does it?

Thanks,

Chris

[Guest Del Rae]

Regarding the W-2 withholding... the IRS treats the withholding as if it was withheld ratably over the year... it is a somewhat common planning "trick" to withhold a large amount with a final paycheck.

[Guest chrisrafter]

Well Del,

That's pretty cool. It seemed like a logical trick to me. I apologize for not knowing it was common, I'm not in the profession, so I just came up with it on my own, and you have validated it for me, thus removing any fears I had about using it.

Thanks,

Chris