Taxes w/h on conversion in error. How to correct > 60 days?
$100K was w/h on $300K conversion to Roth IRA in 2010. Is it too late to replace the w/h after 60 days have elapsed? Does the 10% penalty apply if under 59.5 yrs old? Distribution code is 2 on Form 1099-R.
How do you fill out the Form 8606, Part II. Doesn’t seem like you can “partially” elect to report w/h amount in 2010 and defer the rest to 2011 and 2012?
What can be done now?
Permalink Submitted by Alan Spross on Sun, 2011-03-13 03:57
Unfortuneately, custodians only code Box with respect to the portion that was distributed to the taxpayer or to the taxpayer’s account, not to the IRS. This can obviously result in confusion. If the custodian were required to code for the withholding, they would have to issue another 1099R for the withholding distributions coded 1. The distribution code 2 is only used for the distributed portion if the custodian has evidence that the distribution was rolled to a Roth IRA unless a different exception applies.
Form 8606 only reports the actual conversion amount, ie the funds that were contributed to the Roth IRA. You can only use the two year deferral for amounts actually converted, ie those shown on the 8606. IF taxpayer wants the 2 year deferral, the witholding will not even apply to the year withheld, but on that year’s 1040 taxpayer can request that the withholding be applied to the following year, eg 2011.
Since 33% is far more than the 10% IRA default withholding, the taxpayer must have requested this for a specific reason, eg for avoid an underwithholding penalty.
If the circumstances are such that this is damaging to the taxpayer, ie loss of 100k to either the Roth or TIRA, they could apply to the IRS for a letter ruling to extend the 60 day rollover period so that the rollover can be completed, either back to the TIRA for the 100k or to be added to the 200k conversion. Fee is 3,000 I think for this amount plus legal.