WH Rules
Does anyone have a simple [b]explanation/guideline [/b]on the WH rules from IRAs (normal or premature). Are there penalties? I see many disclaimers and WH notices from custodians, but they are vague and essentially refer back to the IRS.
I realize you can withhold 10-100%, with 10% being the amount if one does not opt out.
Thanks,
pko
Permalink Submitted by mk foss on Fri, 2010-10-15 19:04
Withholding from IRAs is not mandatory. If you are going to withhold federal tax, 10% is the minimum percentage. The confusion arises in how the custodians are dealing with this. Some will withhold unless the client affirmatively asks for no withholding. Others seem to have difficulty if you want more than 10%. The code section is 3405(b) which allows a no withholding election that can be revoked at any time. Section 3405(a) is the section for withholding on pensions, an election to withhold on pensions also can be revoked at any time.
If someone receiving traditional IRA distributions resides outside the U.S. – the tax rate for nonresident aliens (usually 30%) is withheld, even for U.S. citizens. A citizen or green card holder with a home address outside the U.S. or its possesions cannot choose exemption from withholding.
State withholding is another complication. In CA withholding is elective and the minimum rate is 1% but many custodians located outside of CA do not offer an option to withhold state tax. Other states undoubtedly have their own rules.