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Roth conversion with Withholding, under 59 1/2


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How should withholding be reported on a Roth conversion if under 59 1/2? We have 2 opinions.

1. If a conversion occurs for someone under 59.5 and there is withholding then report on 2 1099-Rs. One showing the distribution as code 2 and another saying the withholding was distributed to the client as code 1.

2. The conversion both the cash and withholding would fall under the exception to excise tax withholding so both legs should be reported under a distribution code 2. 

Which is right?

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There should not be withholding, and any withholding would have to be accomplished via a distribution, right? And based on the person's age that would be an impermissible in-service distribution.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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11 hours ago, Suellen Howard said:

These are traditional IRA to Roth IRA conversions where the owner requested withholding to cover the taxes owned due to the conversion.  It can be either internal or external to another IRA custodian.

I don't see how the withholding could be anything other than a regular distribution, Code 1. (Probably defeats the purpose, and then some, if you don't have cash to pay the taxes on the conversion. Unless I don't know something.)

Ed Snyder

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For the 1099R reporting I think it would be:

Box 1- the total gross amount, including the tax withholding

Box 2a- the actual amount of the conversion (gross amount minus the tax withholding)

Box 4- The amount withheld for taxes

Box 7- tax code 2

So the end result shows a gross distribution, the conversion amount in box 2a and the federal withholding in box 4 which should equal to box 1 when those two boxes are added together. no need to to 2 1099R

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On 8/30/2022 at 6:48 PM, Suellen Howard said:

How should withholding be reported on a Roth conversion if under 59 1/2? We have 2 opinions.

1. If a conversion occurs for someone under 59.5 and there is withholding then report on 2 1099-Rs. One showing the distribution as code 2 and another saying the withholding was distributed to the client as code 1.

2. The conversion both the cash and withholding would fall under the exception to excise tax withholding so both legs should be reported under a distribution code 2. 

Which is right?

Option 1. The withholding did not get credited to the Roth IRA and is therefore not part of the Roth conversion. Only the conversion amount qualifies for the Code 2.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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