How does a recharacterization (reversing a Roth IRA conversion) affect taxes withheld from conversion?
Withholding taxes from a conversion amount is not required. In fact, it is usually a really, really bad idea as you are about to find out. Let’s say that you ask your IRA custodian to convert $1000 from your traditional IRA to your Roth IRA and withhold 15%. What you are *really* asking to be done is the equivalent of (1) Converting $850 -plus- (2) Taking an additional $150 distribution and mailing it to the IRS. Using the hypothetical numbers above, you may have meant to convert $1000 to your Roth IRA, but you really only converted the after-tax amount ($850). And you took out an additional $!50 from your IRA which is subject to the same tax and penalty as any other early withdrawal from your IRA. The fact that you had the $150 sent to the IRS does not matter. Unfortunately, since you really only converted the after-tax amount, that’s all you can recharacterize. So, using the above example numbers, $1000 came out of your traditional IRA account, $850 went into your Roth IRA account, a
