@dmertz wrote:
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.
I was just going to say the same thing. Anything that is withheld for taxes is not part of the conversion and you will pay an extra 10% penalty for early withdrawal, unless you are over age 59-1/2, or you separated from service with the employer when you were age 55 or older.
If you think you will be in the 12% bracket, and you can't come up with $2040 for the full income tax this year, you might want to convert the money in steps over a couple of years.
Also note, if you left this employer and they are pressuring you to close your account, you can transfer the money to a traditional IRA with no tax consequences and no withholding, as long as you do a direct institutional transfer. Then, you could convert the money from the traditional IRA to a Roth IRA in stages when you can afford to pay the tax.
