I'm considering converting a portion of a regular IRA to an existing Roth IRA in a direct trustee transfer and would prefer to withhold estimated taxes from IRA funds rather than pay from existing savings. Is this tax withholding subject to 10% penalty? I'm under 59.5 years of age. My financial advisor says no, but review of IRS publications 590-A and 590-B was unclear. Please advise. Thanks.
If you only rollovered only the net amount after withholding into the Roth IRA, then the amount of the tax withheld is considered as a withdrawal and is subject to the early withdrawal penalty of 10% as you are under 59 1/2.
So you will pay income tax on the total amount and the penalty on the amount of tax withheld.
If you only rollovered only the net amount after withholding into the Roth IRA, then the amount of the tax withheld is considered as a withdrawal and is subject to the early withdrawal penalty of 10% as you are under 59 1/2.
So you will pay income tax on the total amount and the penalty on the amount of tax withheld.
In addition to the tax withholding being subject to tax and early-distribution penalty, having taxes withheld (and not substituting other funds to complete the conversion of the entire gross amount of the distribution) compromises the benefit of the Roth conversion somewhat because less ends up in the Roth IRA to grow where the growth will be tax free once the requirements are met.
That is what I initially thought as well. Thanks for the confirmation.