Roth Conversion with taxes withheld from conversion

Submitted by Brian Smith on Thu, 2020-08-20 19:32

Hi,

If a client takes a gross distribution from an IRA of $50,000 and withholds $10,000 worth of taxes in total ($9900 Federal $100 State), can they do a conversion for the full $50,000 or only the net amount of $40,000? Looking for clarification.

Thank you for your help in advance.



Submitted by Alan - IRA critic on Thu, 2020-08-20 20:02

  • Client will only have received 40k, but can replace the 10k withheld with other funds and make a 50k conversion contribution. The withholding of 10k functions as a good down payment on the eventual tax bill for the IRA distribution. 
  • If client does the conversion by a same trustee transfer to the Roth IRA, they will have only a 40k conversion, and will have 60 days to replace the withholding by making a second conversion of 10k. The second conversion could actually be made in the following year (transfer conversion in Dec, and 10k additional conversion in January). This would still be reported on the first year tax return as a 50k conversion on Form 8606, but for purposes of the 5 year conversion holding period, that period starts 1 year earlier on the 40k than it does on the 10k. Client will get a 5498 for year one from Roth custodian and a 10k 5498 from same custodian for the following year. 


Submitted by Brian Smith on Thu, 2020-08-20 20:04

Thank you Alan for your feedback it is greatly appreciated.  Have a great day!



Add new comment

Log in or register to post comments