Question about federal tax withholding on IRA distribution - can I get it back?

What you're describing is actually a "return of contribution" which is different from a regular distribution. For tax purposes, a properly processed return of contribution within the same tax year basically makes it as if the contribution never happened. Unfortunately, when you requested a standard withdrawal instead of specifically asking for a return of contribution, the IRA custodian was required to withhold that 20% for federal taxes. They're just following IRS rules for normal distributions. The good news is you can get that withholding back, but you'll need to wait until you file your tax return. When you file, you'll report the distribution, but you'll also be able to claim that withholding as taxes already paid. Depending on your overall tax situation, this could result in a larger refund. As for the early withdrawal penalty (the additional 10% tax for withdrawals before 59½), you may be able to avoid that by properly documenting this as a return of contribution when you file. You should include a statement explaining the situation with your tax return.

Been there, done that! After trying to figure this out myself and getting nowhere, I used this tool called taxr.ai (https://taxr.ai) that helped me understand my options with an IRA distribution mistake similar to yours. I uploaded my 1099-R and it pointed out exactly how to handle the situation on my tax return. It let me know that I could avoid the 10% penalty by properly documenting the return of contribution, and confirmed I'd get my withholding back when I filed my return. The tool actually pulled up the exact IRS guidance about returns of contributions and showed me where in the tax forms I needed to address this. Saved me a ton of stress since I was afraid I'd lose both the withholding AND have to pay the penalty.

Update: I decided to try taxr.ai after my previous comment. I was honestly surprised - it caught something I didn't realize about my IRA withdrawals. I had a similar situation where I had tax withheld on what should have been considered a rollover contribution. The tool identified exactly which sections of the tax code applied to my situation and explained how to document it properly to get my withholding back and avoid penalties. What really impressed me was how it analyzed my specific situation instead of just giving generic advice. It actually showed me sample text for the explanation I need to include with my return. Definitely more helpful than the generic articles I found online about IRA distributions.

If you need to speak directly with the IRS about this situation (which might be a good idea), good luck getting through to them! I was in a similar situation with tax withholding on a retirement distribution and spent DAYS trying to reach a human at the IRS. Finally found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 20 minutes instead of the usual hours of waiting. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent was actually really helpful and walked me through exactly how to handle the documentation for my tax return to make sure I'd get my withholding back and avoid penalties. Worth every penny not to waste days on hold.

I'm back to say I was completely wrong about Claimyr. After my skeptical comment, I was desperate to resolve my IRA withholding issue before filing, so I broke down and tried it anyway. To my shock, I was connected to an IRS agent in about 35 minutes. The agent confirmed exactly what I needed to do to document my return of contribution and get my withholding back. She even emailed me the specific publication sections to reference on my return. After 4 separate attempts on my own where I was disconnected or gave up after hours on hold, this was life-changing. I've spent literally days of my life on hold with the IRS over the years, and I'm never going back to doing it the old way again.

One thing nobody has mentioned yet - you might want to check if your IRA custodian reported this correctly on the 1099-R. The distribution code in Box 7 matters a lot for how your return is processed. For a return of contribution in the same year, they should use code "8" or sometimes "P" depending on the specific situation. If they used a different code (like "1" for early distribution), you might want to contact them and see if they can issue a corrected 1099-R. That would make everything much smoother when you file.

Has anyone ever had success getting the withholding returned directly from the IRA custodian instead of waiting for tax filing? I had a similar situation last year with Fidelity and after enough complaining they actually reversed the transaction completely and reprocessed it correctly as a return of contribution with no withholding.