The entire $17,000 gross distribution will be added to your AGI whether you have taxes withheld or not. However, only the portion of the $17,000 that makes it to the Roth IRA is the amount converted and the portion that does not make it to the Roth IRA is a distribution made to you, even if it goes to tax withholding. If you are under age 59½ at the time of the distribution, the portion that does not make it to the Roth IRA will also be subject to a 10% early distribution penalty.
The generally recommended method of doing such a conversion is to convert the entire gross amount, with no amount withheld for taxes, and to use other funds make an estimated tax payment for the tax quarter in which the distribution from the traditional retirement account occurs. Assuming a sufficient estimated tax payment, this should avoid any underpayment penalty for not paying the taxes timely.
Subsequent earnings within the Roth IRA will be tax and penalty free once you have met the requirements for qualified Roth IRA distributions. If you are under age 59½, distributions of the converted amount will be income tax free but subject to an early-distribution penalty if distributed prior to 5 years after the beginning of the year in which the distribution from the traditional retirement account occurred.
