72(Q) and tax withheld
An annuity owner is taking a self-determined 72(q) distribution once each year, consisting of $35k gross and $7k federal income tax withheld, for a net of $28k. She wants to eliminate the federal income tax withheld from the distribution this year, because it is expected to be all return of principal. In order to comply with 72(q), she will still need to take $35k gross, and cannot reduce her gross by the reduction in taxes withheld, right?
Permalink Submitted by Alan Spross on Mon, 2010-08-16 20:34
Right. All the IRS cares about is the gross distribution, not the net of withholding figure. Sounds like the insurer is not aware of the 72q plan and therefore considered the earnings to be rollover eligible and therefore subject to mandatory 20% WH. If so, it should stop automatically after the earnings are exhausted (LIFO distributions).
That said, 72q rules follow 72t rules for SEPP options. If she wants to reduce the gross distribution, she could consider the one time switch to the RMD method, but that might result in reducing the annual distribution too much.