Penalty on Withholding
Hello-
Individual that is 45 converted $25K from IRA to Roth and withheld $5K for taxes. The $5K withheld for taxes is subject to the early withdrawal penalty correct?
Thank you!
Hello-
Individual that is 45 converted $25K from IRA to Roth and withheld $5K for taxes. The $5K withheld for taxes is subject to the early withdrawal penalty correct?
Thank you!
Permalink Submitted by David Mertz on Mon, 2022-03-14 15:43
The $5k withheld for taxes is an amount that was distributed from the IRA and not converted to Roth unless the individual substituted $5k from other funds either to complete the conversion of the entire distribution or to roll the $5k back into a qualified retirement account. If not converted or rolled over, the $5k is subject to ordinary income tax and to the 10% early-distribution penalty unless some exception other than the age exception applies.
If the conversion was done trustee-to-trustee such as within a single financial institution, the financial institution should issue two Forms 1099-R, one with code 2 for the portion converted to Roth and the other with code 1 for the $5,000 withheld for taxes.