Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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There are several exceptions to the proportionate allocation, cream-in-the-coffee, all-IRAs- aggregated, scheme described at ¶ 2.2.08 : A. IRA-to-nonIRA-plan rollovers. See ¶ 2.2.09 (A). B. Return of IRA contribution before tax return due date. Certain returned IRA contributions are taxed outside the § 72 “system.” See ¶ 2.1.08 (D), (F). C. QHSAFDs. A Qualified Health Savings Account Funding Distribution (see ¶ 2.1.06 (K)) is deemed to come entirely from the pretax money in the individual’s IRAs until the pretax money is exhausted. § 408(d)(9)(E) . D. Qualified Charitable Distributions. Another exception is for “Qualified Charitable Contributions” (QCDs). A QCD is the distribution of up to $100,000 per year from the IRA(s) of an individual who is over age 70½ directly to an eligible charity; see ¶ 7.6.07 . A QCD is deemed to come first out of the pretax portion of the individual’s IRA. § 408(d)(8)(D) . QCDs were available in tax years 2006–2009 only . 2.3 Income Tax Withholding For the effect of income tax withholding on the recipient’s right to roll over benefits, see ¶ 2.6.02 (first paragraph). 2.3.01 Withholding of federal income taxes: overview Retirement plan distributions are subject to withholding of federal income taxes. This fact creates problems and planning opportunities. This book does not cover state or local withholding requirements. Chapter 24, Subchapter A, of the Code ( § 3401 – § 3406 ) establishes the withholding of income tax at the source of payment. Though titled “Withholding from Wages,” one section of the Chapter ( § 3405 ) also provides income tax withholding rules for QRPs, 403(b) plans, and IRAs. ¶ 2.3.02 explains the Code’s general scheme for withholding from retirement plan distributions, including the different rules for different types of distributions. Exceptions and special rules are discussed at ¶ 2.3.03 . ¶ 2.3.04 explains mutually voluntary withholding. Finally, ¶ 2.3.05 explains how withheld income taxes are applied to the recipient’s tax liability for the year. 2.3.02 Periodic, nonperiodic, and eligible rollover payments Here are the Code’s opening bids on withholding from retirement distributions, including which ones the recipient can opt out of. (If the recipient wants the plan to withhold more income tax than is required, see ¶ 2.3.04 .) The withholding requirements distinguish between “periodic payments” ( § 3405(e)(2) ), “nonperiodic distributions” ( § 3405(e)(3) ), and “eligible rollover distributions” ( § 3405(c)(3) ). A. Periodic payments from all types of retirement plans, including IRAs, are subject to withholding of taxes at the same rate as wages. § 3405(a)(1) . The recipient can elect out of having anything withheld from a periodic payment, so the withholding is voluntary as far

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