Undo and Refund of withholding tax on Roth conversion
This individual did a TIRA to Roth conversion online for 2011, not realizing that auto tax withholding (which he requested) would be taken from the conversion amount, resulting in a reduced amount going into his Roth. He wants a “redo” but has been told the withheld tax is now in the hands of the IRS and this cannot be undone. Is there anything he can do in order to undo this conversion and get an immediate “refund” of the withholding tax, so that he can redo the conversion of the full amount he intended in the first place?
Permalink Submitted by Alan Spross on Tue, 2011-01-11 23:44
He probably was not paying attention to the on line options for withholding. Custodians typically clearly offer the choice of electing NO withholding or to have taxes withheld.
There are alternatives here, but none will recover the funds already withheld. He could reduce his 2011 withholding from other sources or his 2011 estimates to recover the withholding much sooner than waiting until the 2011 filing season. He could also convert an additional amount to get the originally intended amount into the Roth IRA, being careful to decline withholding on the second conversion.
There is no sense in recharacterizing the conversion already done since it will not recover the withheld amount, only erase the conversion that did occur, but not erase the taxable distribution for the withholding. Moreover, the withheld amount is subject to the 10% penalty if he is under 59.5.
The above problems show why the conventional advice is never to pay taxes on conversions out of IRA funds. There may be specific situations where this is appropriate, but not in most cases.
Permalink Submitted by Bill Lohss on Wed, 2011-01-12 15:45
Thanks for your reply. Since the amount withheld for taxes is considered to be a distribution from the TIRA, could the individual “roll” this same amount (from his non-IRA holdings) back into his TIRA (or another qualified plan) within 60 days to avoid the 10% early distribution penalty on this amount?
Permalink Submitted by mk foss on Wed, 2011-01-12 18:11
Yes. The amount withheld for taxes could be replaced by a “rollover” to the same or a different IRA within 60 days of the original distribution to eliminate the tax and penalty.