Withholding tax from IRA for Roth conversion + under 59.5 = penalty, right?

Submitted by Robert Vashko on Mon, 2020-08-31 21:16

If someone under 59.5 converts their IRA to a Roth, and opts to have the conversion tax withheld from the trad IRA, that withheld amount generally counts as a premature distribution and subject to penalty, right?

Assuming that is correct, I have a financial services firm that is issuing a 1099R on the withheld amount but not putting a “1” as the distribution code. I’m trying to figure out if they’re in error, or if I am missing something.

Any thoughts would be appreciated. Please and thank you.



Submitted by David Mertz on Mon, 2020-08-31 21:54

  • Assuming that there is no basis in nondeductible traditional IRA contributions in the individual’s traditional IRAs, yes, an amount withheld for taxes and not replaced using other funds to complete the conversion or rollover of the entire gross distribution is subject to ordinary income tax and is subject to penalty unless the individual has an exception that applies.
  • The instructions for Form 1099-R imply that, under these circumstances, the portion withheld for taxes is to be reported on a code 1 Form 1099-R separate from the converted amount reported on a code 2 Form 1099-R.  However, some IRA custodians incorrectly include the tax withholding on the code 2 Form 1099-R.  If the entire amount is reported on a code 2 Form 1099-R, the individual must be careful that their tax return properly reports the penalty; tax return software will generally not include the penalty on the withholding since the code 2 Form 1099-R is incorrectly reporting the withholding as not being subject to penalty.


Submitted by Robert Vashko on Tue, 2020-09-01 10:09

Thanks.  Just wanted to make sure I wasn’t crazy.



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