Why sign in to the Community?

  • Submit a question
  • Check your notifications
Sign in to the Community or Sign in to TurboTax and start working on your taxes
Level 1
posted Feb 20, 2021 7:09:53 AM

I converted $10,000 of traditional IRA to a Roth IRA. Charles Schwab withheld $1176 in fed. taxes and $588 in state taxes. Is the conversion amount $11,764 or $10,000?

The taxes paid came out of my traditional pre-tax IRA account.

0 3 792
3 Replies
Level 15
Feb 20, 2021 7:14:36 AM

Tax withheld is part of the distribution that will be the 1099-R  box 1 amount.

Level 15
Feb 20, 2021 7:42:06 AM

The amount converted is only the portion that was deposited into the Roth IRA.  To have converted the portion that was withheld for taxes you would have had to substitute other funds to replace those withheld for taxes.

Level 15
Feb 20, 2021 7:54:40 AM

If the $1764 ($1176 plus $588) was withheld from your Traditional IRA funds, then your conversion amount was $8236.

 

If the taxpayer wants to convert (for example) $50,000 from a Traditional to a Roth IRA, and the taxpayer instructs the IRA custodian to withhold 20% for taxes, the custodian will send $10,000 directly to the IRS and only $40,000 will be converted to the Roth IRA. 

 

If the same taxpayer had requested no withholding, and had paid the taxes from "outside" funds (funds not in the Traditional IRA), then the entire $50,000 would have been converted to the Roth IRA.

 

In other words, using IRA funds to pay the taxes on a conversion reduces the conversion amountThe amount withheld for taxes is technically considered a withdrawal prior to the conversion.