IRA Conversion Withholding

[Guest redlenses]

I live in California and I'm doing a Traditional to Roth IRA conversion at Sharebuilder.com, they claim that California Law requires that they withhold part of the conversion for taxes (can't opt-out) - regardless of whether there will be any taxes.

My question is, since they have withheld some of the conversion money, how do I eventually get that money into my Roth IRA? To my knowledge even if you do owe taxes on the conversion, you can pay them out of non-IRA money, so how do I get the withheld amount deposited into my Roth?

I assume this is a common scenario (part of IRA being witheld for taxes), can someone please let me know how this should work?

[Guest redlenses]

Follow on Info:

I elected To have NO Federal tax withholding.

I also had elected to have No state tax withholding. Sharebuilder made me resubmit the conversion request with the box State tax withholding at the required rate checked, but I still had no Federal Tax withheld.

Sharebuilder withheld 10% of the conversion for State Taxes, even though the law clearly states that the state tax amount to be withheld is 10% of the federal tax withheld. 10% of 0 is 0, so I don't understand why they would insist on witholding this 10% of the entire conversion amount for state taxes.

[Appleby]

It seems they misunderstand the rules. You should have them reverse the state tax withholding- ask to speak with a supervisor.

Amount withheld for taxes can be rolled over to the Roth IRA. Ensure that the rollover is deposited as a ‘Roth Conversion’, instead of a regular rollover.

If amounts withheld for taxes are not rolled over within 60-days, that amount would be treated as a regular distribution…not part of the conversion.

[John G]

Let me add a couple of points to Applby's good advice.

- Don't delay, you want to get action quickly.

- Put everything in writing, you need a paper trail if things don't get fixed.

- Bypass the normal clerks that main the desk or answer the phone. You need to talk with the better trained backroom IRA/Roth staff. The first contact at most banks, mutual funds and brokerages don't know the details.

- Get the name and phone number of everyone you talk to from this point forward. Don't be angry, just be professional.

- You may want to call the state offices in California and get a clear response and a contact to buttress your understanding of California tax law.

[Guest redlenses]

The following email did the trick

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No, Califonia's withholding is only mandatory when Federal withholding is elected, Vanguard, Fidelity, E*Trade, and many other much larger brokerage houses (that do a whole lot of these conversions) make this clear in their forms.

From Fidelity: Fidelity investments will withold state tax at the time of conversion if you live in a mandatory state (california, etc) and you elect to have federal taxes witheheld.

From Vanguard:

If federal tax is withheld and you are a resident of CA, DE, NC, OR, or VT: State tax withholding is mandatory unless you specifically elect not to have tax withheld. Vanguard will automatically withhold the minimum required by your state unless you either check the "Do notwithhold" box or specify a higher amount below.

Even Sharebuilder's form does not say what you are claiming!

From Sharebuilder's form: California: "You must withhold 10% of the federal withholding amount unless you specify another amount (zero is not allowed)"

10% of the federal withholding amount ($0 is my case since I elected not to withhold federal taxes) is $0 not $2.50, as I've asked a few times now, please deposit this money that you incorrectly withheld into my Roth IRA. A refund is not acceptable, I want the money in my Roth IRA.

Thank You,

XXXX

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ShareBuilder Customer Care <customercare@sharebuilder.com> wrote:

Dear XXXX,

The state of CA requires that state tax be withheld on any distribution regardless of Federal withholdings. If you have overpaid your state taxes you will receive a refund of the $2.50.

Sincerely,

XXXX

Customer Care Agent

ShareBuilder - Build your Future