State Tax on a Roth IRA Withdrawal?
The b/d I work for is planning to implement state tax withholding rules. Their position is that for states with mandatory withholding, state taxes must be withheld from withdrawals from all qualified plans, including Roth IRAs. Is this a typical approach to Roth IRAs – having state taxes withheld on the distribution?
Thanks for any help you can provide as this seems like such a strange way to approach the “tax-free Roth IRA”.
Permalink Submitted by Alan - IRA critic on Thu, 2015-02-26 23:06
There is no federal withholding from Roth IRAs, not even the 10% default rate that applies to other IRAs (Sec 3405 and 7701). Therefore it makes no sense for any state to require any state withholding on Roth distributions. I doubt that any state has mandatory Roth distribution withholding rules, but it is possible a couple do. I think they should check into this further.
Permalink Submitted by Valerie Johnson on Fri, 2015-02-27 15:46
I’ve requested the b/d provide a list of the states which do require state income taxes be paid even if the Roth distribution is not subject to federal taxes, so we’ll see if they can justify their position. I would love to hear if anyone else’s b/d taxes Roth IRA withdrawals at the state level if it’s not subject to federal. Thanks!
Permalink Submitted by Alan - IRA critic on Fri, 2015-02-27 16:04
I doubt there is any, but even if there was that would not justify mandatory withholding. Even for the federal 10% default rate on TIRA distributions, the taxpayer can elect no withholding. IRA withholding makes rollovers more difficult and is subject to early withdrawal penalty for those under 59.5 who do not replace the withholding from other funds to complete rollovers.
Permalink Submitted by Valerie Johnson on Fri, 2015-02-27 19:23
Can we all say “programming laziness”? They say at this time the system can’t make a distinction between a regular IRA and a Roth IRA, so they’re just applying the state tax withholding rules to everyone. But that system enhancements are in discussion. Maybe they should get the help of a high school computer club.
Permalink Submitted by Alan - IRA critic on Fri, 2015-02-27 19:48
If they are treating Roth IRAs like non Roth IRAs, I doubt that there is a state that has mandatory withholding on any type of IRA. Of course, this would be more annoying for an intended rollover than a distribution as it would force a taxpayer to cough up funds to complete the rollover. Probably 90% of all Roth distributions are tax free under the ordering rules, as most taxpayer do not distribute Roth earnings before the Roth is qualified. This makes no sense.
Permalink Submitted by Jose Morales on Mon, 2015-03-02 16:39
The last time I checked, which was late in 2014, there was no state that had mandatory state withholding without federal withholding being elected. The only states that mandated state withholding if federal withholding is elected are VT, NE, ME, MA. There were 9 states that require state withholding, unless the client actively elects out of state withholding. This situation is just odd and a major oversight if it’s the result of system parameter restrictions. I’d have whoever does the programming start working on correcting this immediately.