Hi - if I over withhold taxes on an IRA to ROTH rollover, does the over-withholding tax come back to me as a non-taxable refund?

[silkytofu]

The scenario would go something like this:

On December 31st, I request a $24k rollover from a traditional IRA to a ROTH, and have 50% ($12k) withheld for taxes. So, the net rollover into the ROTH is $12k. On February 15th of the following year, I file my taxes and find that my ordinary income (ROTH $12k) results in taxable income of $0 due to the standard deduction and other offsets. There are no state income taxes and there is no other income.

My thinking is that the $12k in over withheld taxes would come back to me as a non-taxable federal income tax refund.  If true, then essentially a $24k distribution from a traditional IRA was sheltered from federal income taxes.

Is this correct?

[VolvoGirl]

The taxable amount is the full amount of 24,000.  The whole amount is taxable.  Then you get credit for the withholding .  But yes if your taxable income is reduced to zero you will get the withholding back.  But you might owe the 10% Early Withdrawal Penalty on the amount you didn’t convert to the ROTH.  Which would be the 12,000 held out for taxes.  So you need to replace the withholding from your own money when you put it into the ROTH.

[silkytofu]

Thanks VolvoGirl, in my case I'm over 59.5 years old.  I think this might work as a strategy to minimize taxes on my IRA distributions while drawing down my IRA balance, so I can minimize taxes when RMD kicks in. Thanks for your response!

[VolvoGirl]

Yes it can work out that way.  Good luck.  @dmertz right?

[dmertz]

Yes, the time to do Roth conversions to reduce your balance in traditional IRAs so as to reduce future RMDs its generally prior to age 70½.  It's generally recommended that you convert up enough in one year to fill up your current tax bracket.  The earlier you convert, the longer the investments have to grow tax free in the Roth IRA rather than tax deferred in the traditional IRA.

Regarding withholding, if you have state taxes withheld, deduct the state withholding as an itemized deduction, then receive a refund of some portion of the state withholding, the refund of the state withholding will be taxable.

[silkytofu]

Thanks dmertz and VolvoGirl.  I now have a plan for 2018!