Life and Death Planning for Retirement Benefits

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Chapter 2: Income Tax Issues 121
There are several exceptions to the proportionate allocation, cream-in-the-coffee, all-IRAs-
aggregated, scheme described at
A. IRA-to-nonIRA-plan rollovers. See A).
B. Return of IRA contribution before tax return due date. Certain returned IRA
contributions are taxed outside the “system.” See D), (F).
C. QHSAFDs. A Qualified Health Savings Account Funding Distribution (see K))
is deemed to come entirely from the pretax money in the individual’s IRAs until the pretax
money is exhausted.
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; se A
QCD is deemed to come first out of the pretax portion of the individual’s IRA.
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
(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 establishes the withholding of
income tax at the source of payment. Though titled “Withholding from Wages,” one section of the
Chapter also provides income tax withholding rules for QRPs, 403(b) plans, and IRAs.
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 explains mutually voluntary withholding. Finally,
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 )
The withholding requirements distinguish between “periodic payments” ,
“nonperiodic distributions” , and “eligible rollover distributions” .
A. Periodic payments from all types of retirement plans, including IRAs, are subject to
withholding of taxes at the same rate as wages. The recipient can elect out of
having anything withheld from a periodic payment, so the withholding is voluntary as far