IRA to ROTH Conversion

[CzarSosa]

I am converting my IRA to ROTH over 5 year period and I converted 23000 dollars and the tax was 2300.  Turbo Tax is now asking me these questions, and here are my answers.  Is this correct?

Did you convert the gross amount of $23,000.00 (Box 1) to a Roth IRA?

Because $2,300.00 was withheld in taxes, you should only select Yes if you actually converted $23,000.00 using $2,300.00 of your own money.

Yes, all of this money was converted to a Roth IRA

No, I converted less than $23,000.00

--Actual amount converted 20700--My answer

I didn’t convert any of the money

[DaveF1006]

Yes, your answer is correct. Because you had taxes withheld from the distribution, you did not actually "convert" the full $23,000 into the Roth account. Here is the breakdown of why TurboTax is asking this and the potential tax you should be aware of: 

1. Why "No" is the Right Answer When you do a Roth conversion, the IRS considers any money that doesn't actually land in the Roth IRA to be a withdrawal (cash out), not a conversion. Gross Distribution: $23,000. Tax Withheld: $2,300 (Sent to the IRS) Actual Conversion: $20,700 (Amount that entered the Roth IRA).

By answering "No, I converted less than $23,000" and entering $20,700, you are accurately reflecting what happened

2. The Potential 10% Penalty If you are under age 59½, there is a significant downside to having taxes withheld during a conversion: The $2,300 withheld may be treated as an early withdrawal. Even though that money went to the IRS to pay your taxes, the IRS views it as money you "spent" instead of "converted." You may owe a 10% early withdrawal penalty ($230) on that withheld amount in addition to ‌regular income tax.

Just be aware of this just in case you see an extra $230 tax you weren't aware of.