Fed withholding for IRA Distribution from 401K Distribution; Also Withholding and Exemption

Submitted by Alice Zab on Tue, 2019-03-26 20:34

Person(a.k.a P) over 70.1 has 3 IRAs in one Brokerage (a.k.a B) and 1 401K in another (a.k.a C).
2019, P purchased Asset-Based Long Term Care Insurance (a.k.a LTC) which will administer a rollover IRA, withdrawing a fixed amount RMD (a.k.a LTC-RMDfx) with no Fed withholding (a.k.a LTC-RMDfx-noWH) to pay the LTC premium (Pension Protection Act).

2019, P did a partial rollover to LTC from C 401K after taking 2019 C-401K RMD (a.k.a C-RMD). This means that 2019 C-RMD, included the partial Rollover.

Situation AA 2019: LTC will setup an IRA with the partial Roll-over and begin taking 2019 LTC-RMDfx-noWH (a.k.a 2019LTC-RMDfx-noWH) for the first LTC payment. This means this LTC 2019 distribution would be an additional IRA distribution for 2019. 2019 withholding for this additional distribution is still owed (a.k.a LTC-RMDfx-noWH%)

Situation BB 2020+: Subsequent years (2020+), LTC will continue to take LTC-RMDfx-noWH from the rollover IRA.

P wants to know the best way to pay Fed withholding (LTC-RMD-noWH%) on LTC-RMDfx-noWH for Situation AA 2019 and Situation BB 2020+.

Note: It is my understand that multiple IRA RMD’s can be taken from 1 IRA account but the IRA RMD’s cannot be combined with the 401K RMD and taken from the 401K account.

Question 1: For Situation AA 2019, using the 3 RMDs from IRAs administered by B, to deal with the additional distribution and pay the withholding on the additional distribution, can the LTC-RMDfx-noWH and withholding (LTC-RMDfx-noWH%) be handled as follows:
(1) B determines total RMDs (a.k.a B-RMD2019) of the 3 IRA,
(2) B determines % withholding of B-RMD2019 (a.k.a B-RMD2019%) where B-RMD2019% includes withholding for LTC-RMDfx-noWH.
(3) The final 2019 RMD after withholding and adjusting for the additional RMD that B will deposit in a non-qualified account will be: B-RMD2019 minus 2019 LTC-RMDfx-noWH minus B-RMD2019%.

Question 2: For Situation BB 2020+, is the following allowed per IRS rules for IRA and 401K and withholding: Does IRS allow Fed withholding for an IRA distribution be taken along with 401K distribution: Eg. In 2020, C-401K RMD minus (C-401K RMD withholding +LTC-RMD-noWH%)

Question 3: Regarding correctly specifying withholding where P is married and considered in higher tax bracket.
C’s withholding tool does not allow withholding in % but does allow a fix amount to be specify. Which option is best for P:
Marital Status: Single, # of exemptions.
(S.1) If # of exemption is 0, a fix withholding amount may be specified. P calculates C-401K RMD then calculate % to determine the fix withholding amount. This means every year, P needs to calculate the fix withholding amount.
(S.2) If # of exemption <>0, how is withholding calculated?
Marital Status: Married, # of exemptions.
(M.1) If # of exemptions is 0, what would be the withholding (how is withholding calculated)?
(M.2) If # of exemptions <> 0, how is withholding calculated?

Thank you in advance!



Submitted by Alan - IRA critic on Wed, 2019-03-27 02:34

  1. Under the IRA RMD aggregation rules, RMDs can be taken in any combination from various IRA accounts, and withholding can be elected (often not lower than 10%) from any IRA distribution or 401k distribution as needed. This is totally flexible, with no need to tie any LTC product to a specific IRA account. Generally, then this can be done using the flexibility provided. 
  2.  It is correct that a 401k RMD must be satisfied from the 401k account, while IRA RMDs can be aggregated only with other IRA accounts. 401k withholding for this particular plan is limited to a dollar election, although it is not clear what happens if more than the RMD is distributed.
  3. Most retirees that do not use quarterly estimates will pay withholding based on the prior year tax liability rather than determining a %. But if an IRA account requires a %, the % elected should produce the  desired total WH for all accounts. WH of 100% (110% for higher incomes) of the prior year tax liability meets a safe harbor and no underpayment penalty will apply regardless of how much is owed in April. I wouldn’t even use the C WH tool or attempt to determine # of exemptions.
  4. With respect to taxable income, unless the IRA or 401k includes basis from after tax contributions, all distributions are taxable regardless of how they are used. It is not clear whether the LTC premiums are deductible considering the 10% of AGI floor for medical deductions, and the new higher std deduction which might elimiate itemizing altogether.

Submitted by Alice Zab on Thu, 2019-03-28 15:50

Regarding 4.  LTC premium is a distribution from the IRA, and as you stated, it is taxable.  Since the LTC is not taking withholding, I did not know if there were some rules on the funding source for paying the withholding.  I guess IRS does not care what the funding source is (401K RMD, estimated tax, etc) as long as IRS receives it.

Submitted by Alan - IRA critic on Thu, 2019-03-28 15:59

Yes, that is correct.

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