topic Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty? in Retirement tax questions

Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty?

26486927 — Thu, 19 Mar 2020 19:04:00 GMT

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.

Re: Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty?

MinhT1 — Thu, 19 Mar 2020 19:20:16 GMT

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.

Re: Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty?

dmertz — Thu, 19 Mar 2020 19:49:33 GMT

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.

Re: Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty?

26486927 — Thu, 19 Mar 2020 20:03:59 GMT

That is what I initially thought as well. Thanks for the confirmation.

Re: Are Taxes Withheld in IRA to Roth IRA Conversion Subject to 10% Penalty?

26486927 — Thu, 19 Mar 2020 20:05:10 GMT

Thanks for your help.