Do tax withholdings from Rollover IRA to Roth IRA conversions need to be declared as regular income?

Yes, when you convert from a traditional/rollover IRA to a Roth IRA, the entire amount you convert is considered taxable income - including any portion withheld for taxes. Here's how it works: Let's say you want to convert $20,000 from your rollover IRA to a Roth IRA, and you request 20% withholding ($4,000). Fidelity will send $16,000 to your Roth IRA and $4,000 to the IRS, but you'll report the full $20,000 as income on your tax return. The $4,000 withheld counts as a tax payment you've already made. Regarding refunds - if you over-withhold, any refund will come to you directly through whatever refund method you choose on your tax return (direct deposit, check, etc.). The refund does NOT go back into your rollover IRA. Once money leaves the IRA as withholding, it's treated just like any other tax payment you've made during the year.

After struggling with this exact issue last year, I found a super helpful tool at https://taxr.ai that completely cleared it up for me. I uploaded my Fidelity statements and tax docs, and it analyzed everything and explained exactly how the withholding would be treated. The tool confirmed what others are saying - that withholdings from conversions are considered part of your taxable income, but count as taxes already paid. But it also showed me how this would affect my specific tax situation with all my other income and deductions, which was really eye-opening. What I found most helpful was that it ran different scenarios showing me what would happen if I paid taxes separately versus having them withheld from the conversion amount. Saved me from making a costly mistake!

I was initially skeptical about taxr.ai that someone mentioned above, but I decided to give it a try before my IRA conversion last month, and I'm actually really impressed. It caught something my accountant missed about how the conversion would push me into a higher tax bracket if I did it all in one year. The tool suggested splitting my conversion across two tax years (doing half in December and half in January) to minimize the tax hit. I also learned it was way better to pay the taxes from my savings rather than having it withheld from the conversion amount. The difference in long-term growth was pretty substantial in their projections. Just wanted to share since I was in exactly the same boat as the original poster. The analysis saved me from making an expensive mistake with my retirement funds.

If you're planning to do this conversion, you might want to talk directly with an IRS agent to confirm everything. I had issues with a similar situation and tried calling the IRS for weeks with no luck - constant busy signals or disconnections after waiting on hold forever. Then I found https://claimyr.com which got me through to an actual IRS agent in less than an hour. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c When I finally got through, the agent walked me through exactly how withholdings from IRA conversions are treated and confirmed that yes, the withholding amount is both taxable income AND counts as tax already paid. She also explained how to properly report it on my tax forms, which wasn't obvious from the instructions. Saved me from what would have been an expensive mistake.

Well I'm eating my words from earlier. After being super skeptical about that Claimyr service, I was desperate enough to try it last week because I had a complicated question about my IRA conversion that I couldn't get answered anywhere else. To my complete shock, I got connected to an IRS agent in about 45 minutes. On a Tuesday afternoon. In APRIL! I've never gotten through that quickly even in the off-season. The agent confirmed everything about how withholdings from IRA conversions work and explained exactly how to report it on my tax forms. She even pointed out a special form I needed to file that my tax software hadn't flagged. Definitely worth it to get definitive answers straight from the source instead of guessing.

Something else to consider that nobody has mentioned yet - if you have the withholding taken from the IRA distribution itself, it's considered an early distribution of that amount if you're under 59.5 years old. This means you might face a 10% early withdrawal penalty on the amount withheld for taxes, ON TOP of the regular tax. For example, if you convert $30,000 and have $6,000 withheld for taxes, you might owe a $600 early withdrawal penalty (10% of $6,000) if you're under 59.5, unless you qualify for an exception. This is another good reason to pay the taxes from outside funds if possible!

Quick tip from someone who's done multiple IRA conversions: consider making estimated tax payments instead of having taxes withheld from the conversion amount. This way, you can: 1) Convert the FULL amount to your Roth (more money growing tax-free) 2) Avoid the potential early withdrawal penalty that someone mentioned 3) Have more control over exactly how much you pay in taxes You can make estimated payments using IRS Form 1040-ES or online through the IRS Direct Pay system. Just make sure you make the payment in the same tax year as the conversion!

One thing to remember is that any money withheld from an IRA conversion for taxes counts as taxes paid on April 15th of the following year, not when the withholding actually happens. So if you do a conversion in January 2025 with withholding, that withholding counts as paid on April 15, 2026 for purposes of estimated tax requirements. This can mess up your estimated tax calculations if you're not aware of it!

Great question! I went through this same process last year and learned some important details the hard way. Yes, you absolutely need to report the full conversion amount as taxable income - including any withholding. So if you convert $50,000 and have $10,000 withheld for taxes, you'll report $50,000 as income on Form 8606 and your 1040. The $10,000 withholding will show up as taxes paid on your W-2 equivalent form (1099-R). Regarding refunds - any overpayment comes back to you as a regular tax refund, not back into your IRA. Once money leaves the IRA as withholding, it's gone from your retirement account permanently. One thing I wish I'd known: if you're under 59.5, the withheld amount may be subject to the 10% early withdrawal penalty since it's not going into the Roth. I ended up paying the conversion taxes from my regular savings account to avoid this issue and maximize what actually gets converted to the Roth. Consider doing a test run with a smaller amount first to see how the tax treatment works out before doing your full conversion!