By Ian Berger, JD
IRA Analyst
Question:
I had my IRA custodian send my required minimum distribution (RMD) from my IRA to our church, but had 20% federal taxes withheld. Subsequently, I received two Form 1099-Rs from the custodian. One showed the withheld amount as a taxable amount and had a “7” code. The second showed the balance and had a “7Y” code. Then, when doing my taxes, the tax software also says that the amount withheld is taxable. Is there any way to correct this? Please help.
Bernie
Answer:
Hi Bernie,
You did a qualified charitable distribution (QCD), which is a direct transfer from a tax-free IRA to a charity. (A QCD can be used to offset an RMD for a year if the QCD is done first during the year.) Since QCDs are tax-free, you should not have had taxes withheld. Since the taxes withheld went to the IRS and not to your church, that amount was not a QCD and is therefore taxable to you. That explains why the custodian reported the withheld amount as taxable on the first Form 1099-R. The custodian properly used Code “7Y” for the balance on the second Form 1099-R, since the balance was a tax-free QCD. The mistake of withholding on the QCD cannot be corrected, but you can take a credit for the withholding on your tax return.
Question:
If you’re under age 59½, do a Roth conversion, and withhold from the conversion, are you subject to a 10% early distribution penalty?
Best,
Nick
Answer:
Hi Nick,
Normally, you are not subject to the 10% penalty if you do a conversion before age 59½. However, you will have to pay the penalty on any taxes withheld. That’s because the withheld amounts are not being converted and are considered a standard withdrawal that is being sent to the IRS. This is why we advise paying the taxes on a Roth IRA conversion with other, nonqualified assets – like money from your checking account.
If you have technical questions you would like to have answered, be sure to submit them to mailbag@irahelp.com, to be answered on an upcoming Slott Report Mailbag, published every Thursday.
https://irahelp.com/tax-withholding-from-a-qualified-charitable-distribution-qcd-and-from-a-roth-conversion-todays-slott-report-mailbag/
