Craig Wear, CFP®Craig Wear, CFP® | Expert in Roth Conversions & Tax-Efficient Retirement Strategies for IRA Millionaires

Avoid This Tax Penalty On Your Roth Conversions

17 Aug 2026 · 1 min

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In this segment, Craig Wear explains that converting a traditional IRA to a Roth IRA generates taxable income that is not automatically withheld. Because the tax isn’t taken out at the source, a large conversion can trigger an IRS underpayment penalty if insufficient tax is paid throughout the year. He outlines two ways to avoid the penalty: (1) pay at least 90% of the tax you expect to owe for the current year, or (2) use the prior‑year safe‑harbor rule, which generally requires paying 100% of the total tax shown on the previous year’s return. By meeting either threshold, taxpayers can keep the full conversion amount in the Roth while staying compliant.

Chapters

So when you move money from a traditional IRA into a Roth IRA, that conversion creates taxable income for that year. Unlike with paychecks, the taxes on the conversions aren't withheld automatically, and we don't actually want them to, so we can keep the full conversion amount in the Roth. But someone could complete a large Roth conversion, wait until they file their return, pay every dollar of the resulting tax bill, and still owe underpayment penalty because not enough of that tax was paid during the year. So how do you prevent that penalty? Well, there's a required annual payment you need to pay to the IRS. It's based on the lower of 2 thresholds that let you avoid the underpayment penalty. You can pay at least 90% of the tax you expect to owe for the current year, or you can use what's called the prior year safe harbor rule. So instead of trying to predict this year's final tax bill, it starts with a number that already exists on last year's return. For most taxpayers, the target is 100% of the total tax shown on that return.