2010 Roth conversion with taxes withheld
Taxpayer converted traditional IRA to Roth and elected deferral to 2011 and 2012. Tax was withheld on the conversion, but 1099R only had code “2”. The taxes withheld were not reported as a distribution in 2010. Form 5498 was received by taxpayer June 1, 2011 with Roth conversion net of the withheld taxes. Does the 2010 tax return have to be amended to show the distribution on the withheld taxes, or can this be included on the 2011 tax return?
Permalink Submitted by Alan Spross on Tue, 2012-02-28 17:16
There is never a code shown for withholding, and the 2 code applies only with reference to the converted dollars.
The withheld amount was not converted unless the taxpayer replaced the withholding and completed the conversion within 60 days of the initial distribution. Since this evidently did not happen, the withheld amount does not become eligible for the 2 year deferral and was taxable in 2010 and subject to the 10% penalty in 2010. Therefore, the 2010 return needs to be amended to include this income on line 15 of Form 1040 and the penalty on 58. The 8606 should not be affected by this unless it showed an incorrect amount for the conversion.
Of course, there may be a strategic reason to withhold on a Roth conversion, in most cases it is not recommended and proves costly unless the withholding is replaced to complete the conversion. One reason to withhold is to avoid underpayment penalties due to the conversion since withholding is deemed received equally throughout the year. Over the long run, the largest cost is the loss of the withheld amount from either the TIRA or the Roth IRA.
Permalink Submitted by Jeanne Wray on Tue, 2012-02-28 17:22
thank you!