Jane, who is younger than age 59 1/2, has $50,000 in a previously untaxed traditional IRA. She wants to transfer that IRA to a Roth IRA. Her return in either type of IRA will be 9% per year. Jane cannot afford to pay the income taxes due on the conversion, so she will keep enough money from the rollover to pay all taxes due. She wants to know if the conversion will result in more income for her in retirement. She assumes her marginal income tax bracket will remain unchanged.
Source: http://www.definerothira.com

In this situation, first we must determine how much Jane must withdraw from the traditional IRA to pay her taxes and the 10% penalty that will be due on that withdrawal because she is younger than age 59 1/2. This can be done by using the formula W = T + 0.1W in which W is the total withdrawal and T is the total amount of taxes due on the value of the converted IRA. The formula can be reduced to 0.9W = T.

If Jane is in the 15% marginal bracket and if her IRA is worth $50,000, then on conversion she will owe $7,500 in ordinary income taxes ($50,000 times 0.15). That means:

0.9W = T
0.9W = $7,500
W = $7,500 / 0.9 = $8,333

Jane can then withdraw $8,333 from her traditional IRA, convert the remainder ($41,677) to the Roth IRA, and have enough to pay her income taxes of $7,500 plus her $833 early withdrawal penalty. The $833 is 10% of the total amount withdrawn from the converted IRA.

After-tax comparisons of the Roth IRA to the traditional IRA for each marginal tax rate are shown in the table below. In every case, the Roth IRA fails to match the after-tax results of the unconverted traditional IRA. This failure is due to the lost investment opportunity on the money she withdrew from the converted IRA to pay her taxes and penalty on the conversion.

Q1- April 15,Q2-june 15, Q3- Sep 15, Q4-Jan 15- (Fourl equal estimated payments totaling 100% of previous years income)

My sales/income is down this year 2010 – So I am thinking that now might be a good time to convert a traditional IRA to a Roth. I plan to pay all taxes due in one year (2011).

When would be the most tax advantageous time to convert in 2010.

I am thinking that if I complete the conversion in December 2010, that any excess taxes due above my estimated taxes due could simply be added to my Jan 15 payment and not trigger any late or underpayment penalties because the actual conversion took place at the end of the year. However, I am concerned that the month of the conversion has little meaning to the IRS since I am reporting as annualized estimates because the nature of my income – Commissioned sales – fluctuates so much, my estimates are not calculated every quarter on actual, but calculated on 100% of last year divide by four equal payments.

So is my thinking of converting from Traditional to Roth in December going to make a difference to avoid underpayment or am I just another casualty of the IRS Self-employed TAX laws that penalizes the self-employed for not hiring a tax specialist every quarter to provide actual.

https://personal.vanguard.com/us/insights/taxcenter/tips-rothira-conversion

(I did a search on “roth conversion” at VG homepage and found it

I did a Roth conversion in 2007 because I was getting the Bush Homebuyer Credit of $7500 (which gets to be paid back starting 2011….grrrr!!). I used part of the proceeds to offset any taxes I had to pay from the conversion.

For those who want more information, and a calculator, go here:

http://www.smartmoney.com/pers.....-not-7965/

Took me about an hour.

This should be quite helpful to anyonel ooking to make the switch