taxes withheld on Roth conversion
Pershing LLC forms for a Roth conversion allow for an election to have taxes withheld.
An election was made to withhold taxes from the IRA that was being converted. The IRA consisted of $8000 in total ($2000 pretax and $5000 post tax).
Taxes were withheld as a % of the entire account value in 11/10.
We’ve asked Pershing to redeposit the excess tax that was withheld (approx $1100). Pershing will not.
Can anyone comment if this is a systems/procedural constraint, or if it is an IRS/legal issue that prohibits Pershing from redopositing the taxes withheld?
Permalink Submitted by Alan Spross on Wed, 2011-02-02 23:29
It’s the tax code.
Sec 3405(e) states that for IRA accounts the gross distribution is assumed to be the taxable amount ( in contrast to an eligible rollover distribution from an employer plan).
This provisions exists because the IRA custodian has no idea of what a taxpayer’s basis is in his IRA since basis tracking is between the taxpayer and the IRS. All owned IRAs accounts are aggregated together for purposes of determining the taxpayer’s basis.
Further, since taxpayer is provided an option to decline any withholding or to adjust the withholding upward from the default figure of 10%. This allows the taxpayer to elect a withholding % that more nearly reflects the taxable amount which the taxpayer, but not the IRA custodian is aware of.
Therefore, Pershing is correct. The taxpayer had a chance to decline withholding altogether and neglected to so do. Of course, the taxpayer will recover this withholding when his 1040 is filed in the next couple months. You will also note that if the taxpayer defers the income reporting on a 2010 conversion, amounts withheld in 2010 will not match up to the income year either.