How to Determine the Best Way to Pay Federal Taxes on Large Roth Conversions
Episode 22
How to Determine the Best Way to Pay Federal Taxes on Large Roth Conversions
Published on February 11th, 2026
Episode 22 of Retirement Tax Matters dives into the logistics of executing a Roth conversion, specifically focusing on tax-efficient methods to pay the sometimes large associated IRS bill. While many retirees are tempted to use federal withholding for simplicity, Garrett explains why high-net-worth individuals between $2M and $8M should consider prioritizing paying taxes from outside funds—like a checking or brokerage account—to maximize the tax-free growth engine of the Roth IRA. We discuss the critical age 59 ½ rule to avoid 10% early distribution penalties and how the psychological weight of tax aversion can often prevent retirees from making the most mathematically sound decisions. By utilizing tax-return-driven financial planning, retirees can leverage long-term capital gains in brokerage accounts to fund their conversion liability while doing due diligence to avoid triggering unexpected Medicare IRMAA surcharges or Net Investment Income Tax spikes. The episode concludes with a practical breakdown of using the IRS.gov Direct Pay system and coordinating between your advisor and CPA to ensure your year-end planning has been thought through.
Key Tax Planning Questions
Question 1: How to pay taxes on large Roth Conversions?
Identifying a Roth conversion opportunity is an exciting milestone for most high-net-worth retirees. The prospect of building a tax-free engine that lasts through your retirement—and potentially provides a decade of tax-free growth for your children—is compelling. However, once the conversation shifts to actually writing the check to the IRS, a sense of angst often sets in. This apprehension isn’t always about the dislike of taxes themselves; rather, it arises from uncertainty of how to report the conversion and avoid a large tax surprise come April.
There are three common ways to handle the federal tax liability of a large Roth conversion:
The Simple Path: Federal Withholding Most financial custodians allow you to withhold a specific percentage of your conversion (e.g., 24%) directly from the IRA to pay the IRS. If you convert $100,000 and choose this method, the custodian sends $24,000 to the IRS, leaving only $76,000 to enter your Roth IRA. While this path is fsimple and minimizes underpayment penalties because the IRS treats withholding as if it were paid evenly throughout the year, it is often the least efficient for high-net-worth individuals. By withholding, you permanently reduce the amount of capital that can grow tax-free for the rest of your life.
The Strategic Path: Paying from Outside Funds For retirees in the $2M–$8M asset range, paying the tax bill from a checking, savings, or taxable brokerage account is almost always preferred. This allows the full $100,000 conversion amount to start working in your tax-free Roth engine immediately. Strategically, you can even sell highly appreciated securities in a brokerage account at long-term capital gains rates (15%–23.8%) to generate the cash for the bill, which is far more efficient than paying the higher ordinary income rates often triggered by distributions. This method requires making an estimated tax payment via the IRS Direct Pay website or a voucher.
The Risk-Prone Path: Waiting Until Tax Time The default path for many is simply to do nothing until they file their return the following year. In 2026, this approach is likely to trigger significant underpayment penalties, as the IRS currently charges an interest rate of 7% per year. While you might occasionally find protection under safe harbor rules most high-net-worth retirees prefer the peace of mind that comes from paying as they go. Coordinating with your financial planner and tax preparer to nail down the exact payment amount is the best way to ensure your proactive tax planning doesn't lead to an April surprise.
Question 2: How to avoid underpayment penalties on a Roth Conversion?
As a financial planner this specific topic — the underpayment penalty — remains one of the most confusing areas for both clients and professionals alike. If you feel a bit of a headache coming on when you try to figure out if you owe the IRS interest on a conversion you just completed, you are not alone. Because every individual tax return is a unique story with different income sources and previous-year variables, discussing the specifics of your situation with your tax preparer is highly recommended before you write a check.
The core of the issue is that the IRS operates on a pay-as-you-go system. When you execute a large Roth conversion, the IRS expects their portion of that income at the time it is earned, rather than waiting until the following April. If you wait until tax filing day to pay the bill, you could be hit with an underpayment penalty that, in early 2026, is currently a 7% annual interest rate.
To help you stay on the right side of this rule, we typically focus on what we call Safe Harbor targets. Think of these as penalty-free zones that you and your tax professional aim for during the year:
The Prior-Year Target: The goal here is to pay in a total amount that equals at least 110% of what you owed the previous year. If you hit this target through timely payments or withholding, the IRS generally won't penalize you for underpayment—even if your large Roth conversion creates a massive remaining balance due in April.
The Pay-As-You-Go Target: Alternatively, you can aim to pay in at least 90% of what you will actually owe for the current year. This is harder to hit perfectly if your income fluctuates, but it is a valid path to staying safe from penalties.
The Late-Year Conversion Strategy Many savvy retirees wait until the fourth quarter to do their conversions so they have a clearer picture of their total income. However, making a large estimated payment in December can sometimes trigger an automated penalty because the IRS assumes you earned that income equally starting in January.
This is why a conversation with your CPA is so critical. Ask them about the Annualized Income Installment Method (IRS Form 2210) to effectively tell the IRS your “income” didn't exist in the first three quarters, so we shouldn't be penalized for not paying earlier. While this requires more time and perhaps a bit more in accounting fees, it is the primary way to avoid the 7% "interest trap" on late-year moves without resorting to federal withholding. You must do the math on whether the additional tax preparation fee saves you enough the warrant the work!
Ultimately, while no one likes paying a penalty, don't let it be the tail that wags the dog. A small interest charge is often a minor detail compared to the long-term victory of moving significant assets into a tax-free Roth IRA.
Question 3: My husband and I have about four million in our accounts and we’re thinking about doing a $200k Roth Conversion this year but we are worried about having to pay a massive tax bill especially since we also have a bunch of Apple stock in our brokerage account that has gone up a lot over twenty years... is there a way to give to our church or other charities we like and somehow have that help us pay less for the Roth Conversion or even help us get more money into the Roth IRA and how should we think about our estimated payments if we don't end up with a big bill next spring?
This is a scenario where proactive, tax-return-driven financial planning truly shines for high-net-worth retirees. While Donor-Advised Funds (DAFs) are increasing in popularity, many retirees are still unaware of how to leverage them to unlock larger Roth conversions. If you have highly appreciated stock with a low cost basis, selling those shares would normally trigger a long-term capital gain tax of 15% to 23.8%. However, by donating those shares directly to a DAF, you can neutralize those embedded gains entirely while receiving a charitable deduction for the full market value on the date of contribution.
The financial planning magic happens when this deduction creates space for your conversion. Because a large DAF contribution lowers your Adjusted Gross Income (AGI), it can effectively drop you into a lower tax bracket, allowing you to convert more of your Traditional IRA to a Roth IRA at a lower effective rate than if you had simply written a check to your charity. It is important to remember the 30% rule: when donating long-term held securities, your same-year deduction is generally limited to 30% of your AGI. For example, a $100,000 deduction would typically require at least ~$334,000 in AGI to be fully utilized in the current year.
Coordinating the Estimated Tax Payment Pulling these levers simultaneously is powerful but complex. The most common mistake I see is retirees calculating their estimated tax payment based on the conversion income before factoring in the DAF deduction. Doing so essentially gives the IRS an interest-free loan until you get your refund the following spring.
I use interactive tax planning software with my clients to model these what-if scenarios. By projecting your year-end numbers in advance, you and your tax professional can get real close to your net liability, ensuring your estimated payment is accurate. This coordination allows you to use your checking account funds more efficiently—using them to cover the specific tax bill rather than traditional cash giving—while securing more tax-free legacy funds for your family.
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters. I’m Adam Reed, and joining me is Garrett Crawford, our resident CFP® professional. We are back with another hard-hitting episode focused on the things you can expect to plan through, specifically tax-return-driven financial planning. We’re bringing you quality content today.
Speaking of quality, I have to call out our new microphone arms. For our weekly listeners on YouTube, you can see we’ve upgraded our setup a bit. If you’re listening on Spotify or Apple Music, you should definitely check out the video version this week. We’re changing the world over here, one step at a time. Much like financial and retirement planning, you take small steps to make improvements. We even added a decoration to the wall in the back; who knows what will happen next week? We’re aiming for that 1% improvement every week.
However, I told Garrett we need to be careful. We don't want to end up like my grandma, where one little addition every year for 85 years results in a house full of clutter.
Garrett: We have a saying in our house: you have to know when to pump the brakes.
Adam: Thank you all for joining us again. We talk extensively about tax-return-driven financial planning and how to ease the anxiety of dealing with the IRS. A common concern is whether the IRS will become your biggest beneficiary in retirement. Our goal is to create efficiencies to ensure your money is directed to the people you care about in the most effective way possible. One of the primary tools we discuss, especially in the current 2026 landscape, is the Roth conversion. It is a fantastic way to inherit and move money at efficient times in your life.
If you’ve been following along and have decided that 2026 is the year you’re finally going to do that big Roth conversion you’ve been hearing about, you might find yourself wondering how to actually execute it. We know the "why" behind Roth conversions, but today Garrett and I want to sit down and talk about the "how."
Garrett: That’s a great introduction. As a financial planner, I spend a lot of my time helping clients see the benefits of a Roth conversion, but the conversation often turns to the logistics of how to actually do it. It isn't rocket science, but it can be tricky if you’ve never done one before. We are trying to build a resource library for retirees with assets between $2 million and $8 million. These episodes are based on the real interactions Adam and I have with clients every day.
For this episode, we specifically want to discuss how to pay the estimated taxes associated with a Roth conversion. You don't get to do a conversion for free, so we need to navigate the "ins and outs" to ensure you don’t get into trouble with the IRS at the end of the year. There is an efficient way to do it, a simple way, and a strategic way.
Adam: Could you touch on each of those routes and the pros and cons of each? This is one of those topics where there is the "by the book" answer and then there is the reality of working with real people who have different opinions.
Garrett: Early in my career, the standard answer was that if you want to do a Roth conversion, you should pay the associated taxes with outside funds. Let’s take a step back and look at the basic tax conversation. When you move money from a traditional IRA to a Roth IRA, that is a Roth conversion. You are moving funds from an account you haven't paid taxes on into one where it grows tax-free for the rest of your life, your spouse's life, and an additional ten years for your beneficiaries.
If you do a $100,000 Roth conversion and you are in the 24% tax bracket, you will owe an additional $24,000 in federal income tax. The savvy financial planning move for a high-net-worth retiree is to keep as much money in the Roth IRA as possible so it can grow tax-free. Instead of using a portion of that $100,000 to pay the bill, you would use money from a checking account or a brokerage account to pay the $24,000 via an estimated payment on the IRS website. This leaves the full $100,000 in the Roth IRA to act as a tax-free engine.
The "easier" way, which appeals to people who don't want to dip into their bank savings, is to withhold the taxes directly from the conversion. I can simply instruct a custodian like Charles Schwab to withhold 24% from the conversion. In this scenario, only $76,000 enters the Roth IRA, but you don't have to worry about making estimated tax payments or dealing with the IRS website.
While withholding is simpler, I would argue that for the high-net-worth retirees listening to this podcast, paying with outside funds is usually the better route. Federal withholding is typically for people with limited liquidity or those who simply do not want to manage estimated payments.
Adam: It’s funny because complexity often feels like job security for CPAs, but nothing is ever truly simple in finance. There is one significant "bugaboo" regarding withholding that people should be aware of. If you are under age 59 ½, doing federal withholding on a Roth conversion can be a major snafu.
Garrett: That is a very important rule. If you are younger than 59 ½—perhaps you’re taking a sabbatical year and your income has dropped—do not use federal withholding for a Roth conversion. The IRS will view the withheld amount as an early distribution, and you will be hit with an additional 10% penalty on that money.
Adam: Let's double-click on paying the tax bill through estimated payments. Sometimes when I tell a client we need $20,000 from their savings to pay the tax on a conversion, they get a bit bummed because they like seeing that round number in their bank account. However, many business owners and retirees have built up significant brokerage accounts over the years. How can they use a brokerage account to fund the tax bill strategically?
Garrett: A brokerage account—a non-IRA investment account—is one of the most complicated tax vehicles you can own. People realize this when they see their tax forms. An IRA distribution form is usually one or two pages, but a brokerage account 1099 can be 30 or 40 pages long. This is because everything in that account is taxed differently: qualified dividends, ordinary dividends, and long-term capital gains all have different rates. There are even special rates for things like gold and collectibles.
Because of this, a brokerage account is often a wonderful place to sell positions for long-term capital gains to generate cash for a Roth conversion. If your ordinary income rate is 32%, but your long-term capital gains rate is 15%, it’s very tax-efficient to get money out of that account. We prefer this because money in a Roth IRA grows tax-free, whereas growth in a brokerage account will always be taxed.
This is where tax-return-driven financial planning shines. As planners, we look at all positions—long-term, short-term, unrealized, and realized—to ensure we aren't accidentally triggering Medicare IRMAA premiums or the Net Investment Income Tax. We want to avoid surprises.
One other thing to consider is your year-end refund. If you typically overpay your taxes and expect a $10,000 refund, you can factor that in and make a smaller estimated payment for your Roth conversion. This requires your accountant and financial planner to work together to avoid an April surprise.
Adam: That’s a great callback to our recent discussions on synergy between your financial advisor and your tax preparer. When those people are synced up, it removes a brick from your backpack. You just don't have to worry about it anymore.
Garrett: Exactly. If you’re paying these professionals, put them to work. Regarding the underpayment penalty, this is a touchy spot. In my experience, the consequences of an underpayment penalty aren't usually dire, but nobody likes handing out interest-free loans to the IRS. They want their money throughout the year. If you do a conversion in January but don't pay the tax until April of the following year, you could face a penalty.
Currently, the underpayment penalty can be around 2% per quarter, which is more significant than it used to be. However, there is a "cool feature" with IRA withholding: if you withhold taxes from a distribution or conversion, even on December 31st, the IRS treats it as if it were paid evenly throughout the entire year.
For the high-net-worth retiree, I still generally lean toward making an estimated tax payment. I tell my clients to mentally calculate the liability and pay it via the IRS website immediately. Just be sure not to forget that you made that payment when you file your return in the spring!
Adam: Roth conversions are a massive topic, and I’m sure we’ll have more episodes on them. To initiate one, a DIY person can reach out to their custodian. Most of this is handled on a standard Roth conversion form where you can select 0% withholding. Then, you can move cash from your brokerage to your bank and pay the IRS online.
Garrett: To be honest, setting up the IRS.gov login is probably the hardest part of the whole process. I had to do it recently, and it was more intense than I expected!
Adam: To summarize: the "simple" way is tax withholding, which is easy but less efficient for long-term growth. The "strategic" way is making an estimated payment, which keeps more money in the Roth IRA but requires more manual effort.
We appreciate you following along. Check out our website at retirementtaxmatters.com for free resources, checklists, and more information on tax-return-driven financial planning. Keep liking, subscribing, and following us on Spotify, Apple Music, and YouTube.
Garrett: It’s been a good one, Adam.
Adam: We'll be back next week. This is Retirement Tax Matters. I’m Adam Reed, and this is Garrett Crawford.