How to Save Tax by Using an IRA Rollover to Eliminate Estimated Tax Penalties

An Example of the Tax Savings

Imagine you were supposed to make four estimated tax payments of $250,000 each throughout the year, for a total of $1 million, but you forgot to pay any of them. By October, you still owe the full $1 million, and the IRS will charge about 7 percent in penalties for the missed payments. That means you could owe over $18,000 in non-deductible penalties just for being late.

Instead of accepting the penalty, there’s a legal and creative way to make it disappear completely.

The Problem with Paying Late

If you send a $1 million payment now to cover the missed estimated taxes, it will stop new penalties from growing, but it won’t erase the ones that already exist. The IRS does not let late payments count as if they were made on time, so the penalty clock keeps running until you take the right action.

The One Perfect Way to Erase the Penalty

Here’s how to legally eliminate the penalty using your IRA. You’ll need a retirement account that allows a 60-day rollover and enough money to replace what you temporarily withdraw.

Step one, withdraw $1 million from your IRA and instruct the custodian to withhold the entire amount for federal income taxes. The IRS treats taxes withheld from an IRA as if they were paid evenly throughout the year. That means it looks like you paid $250,000 on each of the due dates, April 15, June 15, September 15, and January 15. As a result, your underpayment penalty disappears.

Step two, within 60 days, repay your IRA the same $1 million using funds from your investment account or another available source. Because you replaced the money within 60 days, the withdrawal is not taxable and there’s no early withdrawal penalty.

The Outcome

Now you have zero estimated tax penalties, your IRA balance is restored, and the IRS treats your withheld taxes as if they were made on time. You’ve effectively used your IRA’s withholding rules as a timing tool to clean up your estimated tax problem.

What Accounts Qualify

This 60-day rollover strategy works with:

Traditional IRA

Roth IRA

SEP IRA

Why It Works

The IRS considers any tax withheld from an IRA withdrawal as if it were paid evenly over the entire year. By using your IRA to withhold the full amount and then repaying it within 60 days, you’re effectively “backdating” your estimated payments to their original due dates. This eliminates the penalty and keeps your tax record clean.

In short, this strategy lets you use your IRA as a short-term bridge to wipe out penalty costs, protect your cash flow, and avoid paying thousands unnecessarily, all while staying fully within the tax rules.