L1: withholding taxesI was wondering if the Government withholds taxes on your withdrawals from a SEPP plan. I have done an estimate on my tax liability for the year I start the SEPP plan, but want to know if the Government requires a large withholding amount on these funds for tax purposes. Thankyou.2010-09-23 23:19, By: Howie, IP: [22.214.171.124]
L2: withholding taxesHi Howie,
The government does not automatically withhold taxes. You have the option of choosing whether ( or not) you want to have taxes withheld from each payment/distribution. When you complete your distribution request, you can (1) Choose to have no withholding or (2) Choose to have withholding of 10% or more. The payor (IRA Custodian or Plan Trustee) will perform the withholding and remit the amount to the IRS on your behalf ( and to the State if State withholding is performed) . The amount of withholding that would be required (that you should elect) is determined by the amount of taxes that you would owe for the year. I don’t know much about withholding requirements for income tax purposes (only about the rules that apply to retirement accounts). Someone else may be able to address that area. You can get information about withholding amounts required for the year in IRS Publication 505 available at www.irs.gov
Hope this helps.
Denise2010-09-24 00:45, By: Denise Appleby, IP: [126.96.36.199]
L3: withholding taxesI would NEVER allow any institution to withhold the federal income taxes, and then remit them to the IRS for me or my clients from a SEPP 72-T.
1. If they do not remit them timely, like paying them in January rather than Dec.,or the institution going bankrupt as many have done, you might bust your plan.
2. In 2009, the IRS changed the tax withholding tables, and provided a special tax credit in place of some of it, in order to “stimulate” the economy by having less withheld and more available for taxpayers to spend. In its infinite level of stupidity, the IRS neglected to consider the millions of taxpayers who did not qualify for the $ 400/person tax credit. These people found out when they prepared their tax returns that they owed more taxes because the IRS had changed the withholdings. It took me 6 months to convince these idiots to waive the “underestimate/underwithholding penalties” that the IRS itself had caused. The taxpayers were innocent dupes in this situation. I finally got the National Taxpayer Advocate, Nina Olson, to intercede for all affected taxpayers.
3. Any error by the institution could bust your plan. You should make your own estimated payments because you should be controlling your own situation.2010-09-24 02:10, By: dlzallestaxes, IP: [188.8.131.52]
L4: withholding taxesI agree in general that withholding from a SEPP distribution should be avoided in favor of other forms of tax payment to the IRS. But I see the risk to the plan coming from confusion over the gross and net distribution instructions rather than from an erroneous handling of the withholding by the custodian. The IRS will be looking at the gross distributions only when assessing SEPP compliance.
Now if the custodian directs so much of your distribution to the IRS that you have tocompromise the plan by taking out extra amounts to live on, you have a different situation because the act that actually busted the plan was the intentional extra distribution, not the error that put you in that position. The ution error PLRs may not cover you in this situation. You could do an extra distribution for 60 days and roll it back if you had an open rollover, and other than that, if the error was totally that of the custodian, press them to give you a loan or otherwise rectify the problem temporarily until the withholding can be recovered.2010-09-24 03:57, By: Alan S., IP: [184.108.40.206]
L5: withholding taxesGood morning Alan. I had requested that my custodian withhold 25% Federal Tax and 7% State tax from my SEPP. I did that because I had requested my first payment to be a lump sum payment and I felt that I would be heavily taxed if I didn’t do so. I get my first payment Sept 30th. Beginning January 2011 I have intentions of changing the payments from annual to monthly. Would I be correct in stating that this forum is recommending that I NOT have my custodian (Fidelity) withhold taxes from the SEPP but rather that I pay the taxes at tax time? And if I make that change, going from having the custodian take out the taxes to not having the custodian do so, would that cause the IRS to audit me or worse to consider this a change in distribution amount and therefore, cause me to incur the 10% penalty? As always your assistance is greatly appreciated.2010-09-24 12:59, By: Rosa, IP: [220.127.116.11]
L6: withholding taxes>>Would I be correct in stating that this forum is recommending
Just as a point ofclarification- this forum does not make recommendations -the thoughts and comments belong to the individual making the post and are not necessarily the opinion of the 72t.net Discussion Forum.2010-09-24 13:26, By: Gfw, IP: [18.104.22.168]
L6: withholding taxes1. If you do not have taxes withheld, you should set aside the appropriate amount, and file estimated tax returns at 4/15, 6/15, 9/15, and 1/15 of the following year, as applicable.
2. Technically, there is a “safe harbor” based upon the prior year’s tax liability, and estimated taxes might not even be necessary FOR THE CALENDAR YEAR OF THE FIRST DISTRIBUTIONS. But, get professional assistance in this regard. In any event, even if no estimated payments might be required, you can still make them, especially if you might be tempted to spend that money, and then not have it for the following 4/15.
2010-09-24 13:54, By: dlzallestaxes, IP: [22.214.171.124]
L4: withholding [email protected] I do see your point on the withholding.However, while it is true that errors can be made- there may not be much need to worry about the remittance of the withholding. Depositing the amount the next year should not be an issue. A payor that withholds taxes in December may have until January 15 to deposit that amount. The remittance is required to include an explanation of the year to which the withholding applies- so- the custodian would let the IRS know that the W/H is for the previous year. There are exceptions to this monthly rule. Some are required to remit withholding semiweekly, and the (usually larger) firms that withhold $100,000 or more per day, are required to deposit the withheld amount on a daily basis.
Additionally, – as Alan said, they would be required to report the gross amount on the 1099-R as a distribution for the year the fund actually left the IRA.
Do you still feel the same way ?
Denise2010-09-24 13:51, By: Denise Appleby, IP: [126.96.36.199]
L5: withholding taxesYes, I still feel this way. The remittance of the withholding was only 1 of several reasons, any one of which gives me pause for concern. I would rather be safe than sorry.2010-09-24 13:56, By: dlzallestaxes, IP: [188.8.131.52]
L5: withholding taxesGood morning Denise:
I believe your position is that having the custodian / trustee withhold estimated taxes and send them to the IRS is OK. If so then I agree with your position.
Custodians are set up to make these withholdings and remit to the IRS or state as appropriate. I have never had any issues with withholding / remitting with any custodian for my clients. The only problems I have seen is the taxpayer failing to make the estimated tax payments. If the custodiandoes make an error and you catch it early, the custodian has some latitude to make the correction and issue the correct Form 1099-R. The custodian’s mandatory reporting date to the IRS is after the mandatory reporting date to the individual. So the individual may have received their Form 1099-R, found the error, reported it to the custodian and receive the correct Form 1099-R well before tax filing time.
So my recommendation is to let the custodian withhold and remit.
Jim2010-09-24 16:32, By: Jim, IP: [184.108.40.206]
L6: withholding taxes
Good morning to you too Jim:
I agree with you, 100-% on everything!2010-09-24 16:48, By: Denise Appleby, IP: [220.127.116.11]
L7: withholding taxesMy experience with two different SEPP 72t Plans I have currently running, one of which was moved to a different custodian, so now a total of 3 different well known custodians, is that they all ask you at the outset to specify in either dollar amount or percent of gross the FED TAX and (if applicable) STATE TAX withholdings from the gross on each payment. You can also change these tax figures in the future,if you need to. In my mind, it can muddy the water on theSEPP tax withholding question that was posed when the discussion changes toproblems with someone else’suse of tax tables, (such as for payroll purposes) and the specific problem that DLZ illustrated that happened to some of his clients. In addition, I had to file qtrly estimates ina year prior to starting these SEPP’s in 06 and then 07,with both FED and State, and it was a pain to remember those four filing dates for submitting estimated payments to each entity, and to find the coupon, and do the calculation, and in addition the dates are not all3 months apart, which caught me by surprise in JULY when I realized that I was one month late on the June Qtrly payment that fell two months after the Aprilpayment. Finally, if you cannot trust your custodian to properly record and submit your withholding taxes, then you probably should not trust them with your IRA, or your SEPP distribution. It is so much less of a hassle to just let them take out the taxes for you.It has worked for me since March 2006. Just my opinion. KEN2010-09-24 21:00, By: Ken, IP: [18.104.22.168]
L8: withholding taxesThanks Ken. I appreciate your info. It clears things up greatly for me!2010-09-26 00:32, By: rosa, IP: [22.214.171.124]
L9: withholding taxesRosa,
Glad I was able to help. KEN2010-09-26 03:08, By: Ken, IP: [126.96.36.199]