As long as you pay 100% of last year's tax bill, you'll avoid an underpayment penalty. By Kimberly Lankford, Contributing Editor June 3, 2011 I converted my 401(k) to a Roth IRA in 2010 and took advantage of the option to split the tax on the conversion between my 2011 and 2012 returns. Do I need to increase my tax withholding for 2011 or make quarterly estimated tax payments to avoid an underpayment penalty? -- Jenny Zhang, Fairfax, Va.You might be okay for 2011, but you'll probably need to withhold some extra money in 2012. The amount converted to a Roth IRA is taxed like ordinary income from a job. Normally, you'd get hit with an underpayment penalty on your 2011 return if you failed to pay at least 90% of the tax you owe through withholding and/or estimated taxes. But there's a safe-harbor rule designed for people like you who experience an unusual bump in income: As long as you pay at least 100% of last year's tax bill (or 110% if your adjusted gross income is $150,000 or more), you'll avoid an underpayment penalty. And in any case, the underpayment penalty does not apply if you owe less than $1,000. But this safe-harbor rule generally helps only with a one-year income blip. If your regular withholding falls short of covering your 2011 tax bill, then you may want to boost your withholding or pay quarterly taxes in 2012 to avoid an underpayment penalty, says Mark Luscombe, principal tax analyst with CCH, a tax information and software company. Advertisement Goodbye muni bond insurance We invest in municipal bonds. We've read about the turmoil in the muni insurance industry. Can you tell us what's going on? -- William Bergmark, Ithaca, N.Y. The two main insurers, MBIA and Ambac, once covered about half of all municipal bonds. But they are no longer in this business after becoming insolvent following the credit crisis of 2007. The muni insurers, egged on by their shareholders and by Wall Street, had expanded beyond the safe but dull business of guaranteeing municipal bond debt and ventured into insuring mortgage-backed securities and other derivatives. When those products collapsed during the financial crisis, the bond insurers went down with them. Only one small insurer, Assured Guaranty, still offers such insurance, and it covers less than 5% of the new municipal debt issued. But don't worry. Insurance is no longer a factor in assessing the safety of tax-free municipal bonds, and in most cases, insurance was never needed. Municipal bonds remain extremely safe, and many of them are backed either by tax revenues or by money held in reserve, such as Treasury bonds. Few municipalities defaulted even during the worst of the Wall Street crisis, so nobody has been harmed by the virtual disappearance of the insurance. It's more important to focus on the credit quality of the bond issuer than to fixate on insurance. In fact, a triple-A bond today is sounder than one that received a triple-A rating in the past merely because it was backed by insurance. Advertisement Scholarships and 529 plans Our son starts college in the fall, and we are thrilled that he won a full-tuition scholarship worth more than $40,000 per year. We now expect to pay less than $15,000 per year for room and board and books. How can we use the excess 529 money? -- P.M., Rochester, N.Y. Congratulations to your son! Normally, you would owe income taxes and a 10% penalty on the earnings portion of 529 withdrawals that aren't used for qualified education expenses. But there is an exception for tax-free scholarships: You can withdraw up to the amount of the scholarship without being subject to the 10% penalty (you will still have to pay ordinary income taxes on the earnings). "When taking a scholarship withdrawal, make sure the money [and the 1099 form reporting the withdrawal] is sent to the student, who is likely to be in a lower tax bracket than you," advises Joe Hurley, founder of Savingforcollege.com. Most 529 plans give you the option of making withdrawals payable to the owner, the beneficiary or the school. Also, look for other eligible expenses that will allow you to use 529 funds tax-free -- not only room and board and books, but also mandatory fees. If your son ends up going to graduate school, he can use the 529 money for those expenses. Or you can switch the beneficiary of the 529 plan to another family member who plans to attend college. Financial books for recent grads Can you recommend any good investment books for my two children, who are recent college graduates? They are novices about money and investing, so I am looking for good beginners' books. -- Steve Frick, Walker, Minn. Advertisement One of the best investing primers is Investing 101, written by my colleague Kathy Kristof. The book is a great read and explains everything they need to know to start investing. It begins with goal setting and explaining how diversification works, then goes into detail about investing in stocks, bonds, mutual funds and other investments. One chapter shows how to start small and build a portfolio even if you have only $25 to $50 per month to invest. A "lazy investor's portfolio planner" is designed for people who don't want to spend a lot of time monitoring their investments. For more investing insight, see Common Sense on Mutual Funds, by Vanguard founder John Bogle. The Wall Street Journal Guide to Starting Your Financial Life is a great roadmap to help new grads learn about all their finances, from checking accounts and credit scores to insurance and investing. Kiplinger's editor Janet Bodnar's Money Smart Women covers investing and a whole range of financial issues, starting with college grads (and it's a great resource for both men and women). And a good online guide to real-world personal finances that you can read throughout the year is Stacy Rapacon's Starting Out column at Kiplinger.com. Stop ID thieves cold I've heard that freezing my credit report is a good way to protect myself against identity theft. How does it work? -- B.S., Daytona Beach, Fla. Freezing your credit report at all three credit bureaus (Equifax.com, TransUnion.com and Experian) prevents lenders and other companies from accessing information without your permission. That can stop identity thieves from taking out new credit in your name. Firms you currently do business with are exempt from the freeze, and you can use a PIN to thaw your report if you want to grant access to a new lender. But the cost can add up: It usually costs $10 to freeze your account at each bureau and another $10 to lift it, although the charge may be waived for ID-theft victims. My thanks to Jeff Kosnett for his help this month.