What You Need to Know About Withholding and Your IRA
What You Should Know About IRA Withholding Rules
When you take a distribution from a traditional IRA, you typically owe federal income taxes. To ensure those taxes are paid, the IRS enforces a withholding requirement on most IRA withdrawals. The system gives you flexibility, but it also comes with important rules that can affect your tax liability if misunderstood.
Understanding How Withholding Works on IRA Distributions
If you receive more than $200 in distributions from your traditional IRA within a calendar year, your IRA custodian must apply federal income tax withholding. Roth IRA distributions are generally excluded from this rule, unless the withdrawal is not qualified.
Before the distribution takes place, the custodian must provide you with a written notice explaining your withholding rights. You have several options. You can choose to withhold nothing, withhold 10 percent, or withhold more than 10 percent. In fact, you could elect to withhold 100 percent of the distribution, although that is rarely advisable.
If you don’t make a withholding election, the default will apply. In most cases, that means 10 percent of your distribution will automatically be withheld and remitted to the IRS. This 10 percent rule also applies to conversions from a traditional IRA to a Roth IRA. If you plan to convert the entire amount and want to avoid reducing the amount transferred, you must elect zero percent withholding. Any withheld portion does not count toward the converted amount.
Annuity-based IRA distributions, once annuitized, follow a different rule. These distributions are treated similarly to wages for tax purposes, and you may still opt out of withholding entirely.
Choosing the Right Withholding Amount for Your Situation
Your IRA custodian is required to offer the withholding options, but they do not advise you on how much to withhold. That decision depends on your broader tax picture. Your total expected income, deductions, available tax credits, and other sources of withholding all influence what the right number should be.
If you do not withhold enough or fail to make adequate estimated tax payments, you could face underpayment penalties at the end of the year. One advantage of withholding is that it counts as if paid evenly throughout the year, regardless of when the distribution occurs. This timing flexibility can help if you take a large distribution late in the year and need to catch up on missed estimated tax obligations.
Some individuals incorrectly assume that withholding 10 percent covers their tax liability, but this often results in a tax bill at filing. The federal 10 percent tax bracket for 2024 only applies to taxable income up to $11,600 for single filers and $23,200 for married couples filing jointly. Most retirees exceed these amounts once Social Security, pension income, or additional IRA distributions are considered. Therefore, withholding only 10 percent from your IRA may leave a large portion of your tax due unpaid until April.
Don’t Overlook State Tax Withholding
Federal taxes are only part of the story. Many states require their own withholding on IRA distributions, and the rules vary widely by location. Some states apply default rates, while others allow for customization. Ignoring state tax requirements can lead to surprises and possibly penalties when you file your state return.
Because IRA withholding touches both federal and state rules and directly impacts your annual tax liability, careful planning is essential. The correct withholding rate prevents underpayment penalties and keeps you from facing large lump-sum tax bills.
Frequently Asked Questions
When does federal withholding apply to my IRA?
Federal withholding applies if you receive more than $200 from your traditional IRA in a year. It does not typically apply to Roth IRA distributions.
What happens if I don’t make a withholding election?
If no election is made after proper notice, your IRA custodian must withhold 10 percent from your distribution and send it to the IRS.
Can I change my withholding amount?
Yes. You can choose to withhold any amount from zero percent up to 100 percent. Your election must be made before the distribution is processed.
Does withholding apply to Roth conversions?
Yes. If you convert a traditional IRA to a Roth IRA, any withheld amount is not included in the conversion. If you want to convert the full balance, you must elect zero percent withholding.
Is state withholding required?
In many cases, yes. State rules vary. Check with your financial advisor or tax professional to understand your obligations.
Plan With Clarity
Avoid surprises at tax time by choosing the right IRA withholding strategy.
Schedule a complimentary consultation with a licensed advisor today.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.