Since you did not substitute other funds to replace the $300 that was withheld for taxes, only $2,700 was converted. Telling TurboTax that you converted $3,000 implies that you substituted other funds within 60 days of the distribution from the traditional IRA and you ended up with $3,000 moving to the Roth IRA.
If you are under age 59½:
- The $300 that was not converted to Roth is subject to a 10% early distribution penalty on the taxable amount (usually the entire $300) in addition to the income tax.
- Assuming that the conversion was done by direct transfer, you should receive two Forms 1099-R, one with code 2 showing a distribution of $2,700 that was converted to Roth, none of which was withheld for taxes, and a code 1 Form 1099-R showing a distribution of $300, all of which was withheld for taxes. However, some custodians mistakenly report the entire $3,000 and tax withholding together on a single code 2 Form 1099-R making it difficult for you to report the distribution properly so that your tax return show the correct penalty.
If you were over age 59½ at the time of the distribution from the traditional IRA:
- The entire $3,000 distribution and tax withholding will will be reported on a single code 7 Form 1099-R.
Note that telling TurboTax that you converted $3,000, which is incorrect, won't produce an incorrect taxable amount on line 4b of your Form 1040, but it will cause TurboTax to generate an incorrect Form 8606.
