Special Forgiveness for Conversion Withholding Goof?
I made a dumb error–ironically, because I’m such a conscientious taxpayer. I pay lots of estimated tax each year, way over my safe harbor. And I had been filling out some forms for RMDs on accounts inherited from my father; I always upped the withholding on those to accord with my tax bracket. So, when doing a Roth conversion of my husband’s IRA in December, I marked “withhold 30%,” wanting to make sure the government would get its money right away. I have cash to pay the conversion tax, and that’s what I intended to do–I just didn’t think through the fact that the withholding would reduce the amount converted. Dumb, I know, because we’re under 59-1/2.
I just figured this out while doing our taxes, and the 60 days for fixing the error are past. But are there any special rules or forgiveness for a situation like this? What irritates me is that *we* haven’t had the use of that money for the last three months–the government has! And I’m way over the safe harbor for estimated taxes. I could replace the funds in the converted account with cash before April 15. Why should we pay a 10% penalty for giving the government their money earlier than we had to?!?
I’d appreciate any thoughts on this. Thanks so much, Deborah
Permalink Submitted by Alan Spross on Sat, 2011-03-26 21:14
Unfortuneately, there is no special exception and even the hardship provision copied below will probably not help you unless there is a legitmate hardship. Here is what Sec 402(c)(3)(B) indicates:
>>>>>>>>>>>>>>>>
(B) Hardship exception
The Secretary may waive the 60-day requirement under
subparagraph (A) where the failure to waive such requirement
would be against equity or good conscience, including casualty,
disaster, or other events beyond the reasonable control of the
individual subject to such requirement.
>>>>>>>>>>>>>>
The fee to request a letter ruling varies by amount but legal costs to request a ruling are in addition.
You must have been intending to report the entire conversion in 2010 to have had withholding taken in 2010? You could still defer the taxes for 2 years if you wanted and cut your other tax payments down if you want the refund applied to 2011 taxes. Or you could get the refund within a few days of e filing. On the penalty, unless you have a penalty exception there is no cure for that without IRS extending the 60 day rollover period. The other problem is that the withholding is permently lost to your IRAs without the rollover extension. And from what you indicated, it is probably throwing good money after bad to request an extension given the wording copied above.
Permalink Submitted by DEBORAH MERRITT on Mon, 2011-03-28 16:52
Thanks very much for the detailed reply. I figured this was the answer, and the amount at issue isn’t worth further legal pursuit. I just wanted to make sure I wasn’t missing some little-known avenue. I’ll just chalk this one up to misguided patriotism–and the fact that my son was very ill so I wasn’t paying sufficient attention. Thanks again, Deborah