Yes the withholding is still taxable. The whole amount taken out of the Traditional IRA is taxable now. If you wanted the whole amount to go into the ROTH you have to replace the withholding with other money. But it will still be taxable.
Just enter the 1099Rs. It should be be easy. You will owe tax but not the 10% Early Withdrawal Penalty on the conversion.
Enter a 1099R under
Federal Taxes
Wages & Income
Then scroll way down to Retirement Plans and Social Security
Then IRA, 401(k), Pension Plan Withdrawals (1099-R) – Click Start
Don't type the bank name or try to import it.
At the bottom pick - Change How I enter my Form
Then on the next screen pick - I'll Type it in Myself
The withholding is just an estimated amount. At the end of the year you will get a form 1099R to enter into your tax return. The withholding will be in box 4. On your tax return you enter the full amount as income. Then you get credit for the withholding on line 25b.
You still have to enter the whole gross original amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The gross amount shows up,on 1040 line 4a or 5a and the taxable amount on 4b or 5b. The withholding will show up on 1040 line 25b.
