Yes, your answer is correct. Because you had taxes withheld from the distribution, you did not actually "convert" the full $23,000 into the Roth account. Here is the breakdown of why TurboTax is aski...
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Yes, your answer is correct. Because you had taxes withheld from the distribution, you did not actually "convert" the full $23,000 into the Roth account. Here is the breakdown of why TurboTax is asking this and the potential tax you should be aware of:
1. Why "No" is the Right Answer When you do a Roth conversion, the IRS considers any money that doesn't actually land in the Roth IRA to be a withdrawal (cash out), not a conversion. Gross Distribution: $23,000. Tax Withheld: $2,300 (Sent to the IRS) Actual Conversion: $20,700 (Amount that entered the Roth IRA).
By answering "No, I converted less than $23,000" and entering $20,700, you are accurately reflecting what happened
2. The Potential 10% Penalty If you are under age 59½, there is a significant downside to having taxes withheld during a conversion: The $2,300 withheld may be treated as an early withdrawal. Even though that money went to the IRS to pay your taxes, the IRS views it as money you "spent" instead of "converted." You may owe a 10% early withdrawal penalty ($230) on that withheld amount in addition to regular income tax.
Just be aware of this just in case you see an extra $230 tax you weren't aware of.
