Roth Conversion – Tax Withholdings

Submitted by Rebecca Hines on Thu, 2023-05-11 15:37

Does this scenario work:

Taxpayer does a Roth Conversion and has federal taxes withheld (since withholdings are considered paid to the IRS evenly throughout the year) as opposed to making a large fourth quarter tax payment (which could result in a payment penalty at tax time). Can the taxpayer then use other funds to make up the tax withholdings and add to the (net) Roth Conversion to make the dollar amount whole again?

e.g., Gross distribution $100K, tax withholdings $20K; Taxpayer adds personal funds of $20K to $80K net distribution and deposits $100K in Roth IRA.

Thank you!



Submitted by Alan - IRA critic on Thu, 2023-05-11 16:19

  • Yes, the taxpayer could replace the 20k withheld by using other funds to roll into the Roth IRA as a second conversion within 60 days of the distribution. The total of 100k would then be reported on the prior year return Form 8606 as a conversion and credit claimed for withholding. The one rollover limitation does not apply to conversions.
  • That said, if the rollover of the amount withheld is completed after the end of the distribution year, Form 5498 issued by the Roth custodian will report an 80k conversion contribution in the prior year and a 20k conversion contribution for the following year. Therefore, the conversion 5 year holding period for the 80k conversion will end one year prior to the 5 year holding period for the 20k conversion contribution. This might be somewhat confusing for the taxpayer to keep track of due to different accounting for reporting the conversion vs the actual conversion contributions for Roth IRA tracking, but is not otherwise a problem. 

Submitted by Rebecca Hines on Fri, 2023-05-12 15:53

Thank you!  

Submitted by David Mertz on Thu, 2023-05-11 18:45

The second bullet above assumes that the deposit of the $20k into the Roth IRA occurs within 60 days, but after the end of the year in which the distribution occurred.  If both the $80k and the $20k reach the Roth IRA before year-end, a total of $100k of conversion contributions will be shown on that year’s Form 5498.

Submitted by Rebecca Hines on Fri, 2023-05-12 15:53

Perfect!  Thank you!

Submitted by PaulC on Fri, 2023-05-12 15:00

Withholding taxes from a Roth conversion isn’t the only method to avoid getting hit with an underpayment of estimated taxes penalty. The annualized income installment method of calculating quarterly estimated tax payments can be used to eliminate the penalty. In effect, the resulting worksheet of the tax return shows how estimated tax payments made in a quarter did align with the quarter when the income was realized. Such an approach could be used in the above situation where the Roth conversion income was incurred in the fourth quarter and the applicable estimated tax payment was paid by the January 15th fourth quarter deadline. Using the annualized income method could avoid an underpayment penalty that could otherwise be incurred, without a need for doing any withholding from the conversion distribution.

Submitted by Rebecca Hines on Fri, 2023-05-12 15:56

Yes.  This is what I’m doing now, but it’s time consuming and sometimes the taxpayer doesn’t have this information readily available (I complete Form 2210 personally as I maintain this information quarterly).  Just trying to be pro-active and offer other solutions.  Thank you!

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