Roth Conversion with Tax Withheld

[HL1]

Did a Roth Conversion from Traditional IRA with 10% tax withheld, received 1099R the gross distribution and taxable amount shows the conversion amount of $2000, tax withheld of $200.  The actual deposit to Roth account was $1800.  When enter this information in TT.  Need some clarification on the TT interview questions. Which answer would apply:  

1. Yes, added $200 to the $1800 got (total of $2000) 
2. No, didn't add $200 to the $1800 got

[TomD8 · Accepted solution]

If you used the funds from the conversion to pay the taxes, then you didn't "add the $200."  In effect, you converted $1800 and took out $200 to pay the tax. That's why the actual deposit to your Roth was only $1800.

If you had converted the entire $2,000 and paid the $200 tax bill with outside funds, that would be "adding" the $200.

If you're under 59 1/2, you'll incur the 10% withdrawal penalty on the $200 you didn't convert.

This is a good example of why it's better to avoid using the funds from a Roth conversion to pay the tax on the conversion.