If you’re considering converting your Traditional IRA to a Roth IRA, remember that you will need to pay taxes on the conversion amount and you may be subject to an underpayment penalty because of it (if you fail to file estimated tax payments).
The federal tax law regarding underpayment is straightforward. If you pay more taxes this year than you owed last year, you’re in the clear. If you don’t but are within 90% of your tax liability, you are also in the clear. State tax law will differ and you’ll have to check with your state (for example, Maryland’s law is that you have to pay more than 110% than last year or be within 90%).
So, if you make a conversion, be sure to begin paying estimated tax payments with a 1040ES so you aren’t subject to a penalty. As always, consult with a tax professional before you make any important decisions.
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