Can Backup Withholding Be Taken From an IRA?

IRAs are subject to backup withholding.

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Reporting accurate income information to the IRS is the basis for determining your tax burden. When you fail to report all of your investment income, the IRS subjects you to backup withholding. All payers who issue you a 1099 either annually or for distributions are required to take backup withholding from your interest or dividends, including your individual retirement account provider. Generally speaking, if you fill out a Form W-9 when you open the account, the IRS may take its share of backup withholding if you owe it.

Individual Retirement Accounts

Individual retirement accounts, or IRAs, are tax-advantaged retirement accounts for saving toward your golden years. Traditional IRAs allow you to defer paying taxes on your contributions and earnings until you are retired and in a lower tax bracket. Roth IRAs allow you to contribute on a post-tax basis and withdraw your earnings tax-free in retirement. When you take a distribution from your IRA, your provider sends a 1099-R to the IRS acknowledging the payment.

Form W-9

Any payer who is required to submit financial information to the IRS on a 1099 tax form must receive a signed Form W-9 Request for Taxpayer Identification Number and Certification from you. The W-9 form collects your name, address, tax ID number and certification regarding backup withholding. You must correctly enter all your information and sign the document to open your IRA.

Backup Withholding

Most taxpayers are not subject to backup withholding. The IRS only assesses backup withholding on specific taxpayers. If you previously underreported income, you may receive a letter from the IRS notifying you are now subject to backup withholding, which takes 28 percent of your balance. Your IRA provider may also assess backup withholding if you did not correctly fill out Form W-9 or failed to certify your backup withholding status on the W-9 form.

Mistakes and Credits

Typos happen, and you can fix a minor slip-up before backup withholding occurs. If you are notified by your IRA provider that you have an incorrect taxpayer ID on your W-9, resubmit your documents with the correct information. If backup withholding is initiated against your account, you may take a tax credit the subsequent year to recover money taken through backup withholding.