Yes, you can recharacterize the 2017 conversion back to a traditional IRA. The amount that you converted was $5,000. The bank will transfer back the $5,000 plus the $4.35 of earnings.
The $500 of withholding is an amount distributed from your traditional IRA that was not converted, and is now in the hands of the IRS, no longer under the control of the bank. This withholding entered in box 4 of TurboTax's 1099-R form will be included on Form 1040 line 64 or Form 1040A line 40 to be applied against your overall tax liability. If your total withholding and estimated tax payments exceed your overall tax liability, you'll get a tax refund, if less, you'll have a balance due.
If it has been 60 days or less from the date in December on which the distribution from the traditional IRA was made, you can use $500 from another source to roll the $500 withheld for taxes back to the traditional IRA (provided you made no other rollovers of distributions from an IRA at any time in the 12 months prior to the December 2017 distribution) and avoid any tax or early-distribution penalty on the $500 withheld. If it's already been more than 60 days, you are stuck with the $500 being a distribution from your traditional IRA that is subject to income tax and potentially a 10% early-distribution penalty if you were under age 59½ at the time of the distribution in December.
Due to tax-law changes, conversions in 2017 are the last ones that will be permitted to be recharacterized. Conversions performed in 2018 and beyond will not be permitted to be recharacterized.
