I recently changed jobs and my old job had an Employee Stock Ownership Plan (ESOP). After starting my new job I rolled my old ESOP over to a traditional IRA. Within days of this rollover taking place I then did a Roth Conversion on that original ESOP money. When I did so I had them withhold 20% of that money for taxes since the money was going from the traditional IRA to a Roth IRA.
I'm trying to figure out if I have misunderstood my situation as it looks like I owe a 10% penalty on the 20% I withheld for taxes. If I withheld taxes on the conversion is that money subject to the 10% penalty? In my head I was thinking no because the overall amount got converted directly so it was within the 60 day window and it was just taxes that were withheld. However now I am wondering if the only way to bypass the 10% penalty is to convert the entire amount and pay the taxes using money I have on hand and not have it withheld during the conversion.
If anyone could provide some insight on this it would be greatly appreciated. Much obliged.
why do you think you owe a 10% penalty? where is that appearing?
I elected to have 20% of the Roth conversion withheld for taxes. I received two 1099-R forms. One for the 80% and another for the 20%. That 1099-R form is showing the whole amount is taxable and they code listed is "1", which is labeled as "Early distribution, no known exception (in most cases, under age 59 1/2)". TurboTax is telling my I owe the 10% penalty as well.
I don't know why the code is a 1 because it wasn't a distribution to me it was the amount I designated to be withheld for the taxes.
unless you are eligible for an exception (e.g. medical, disaster), a conversion from Traditional IRA to Roth IRA is subject to the 10% if you are under 59 1.2 , so I suspect you TT is calculating the penalty on the entire balance rolled to the Roth (you can see the penality under 'other taxes' on Form 1040, line 14)
are you over/ under 59 1.2?