IRS Tax Withholding Notice
A custodian I deal with recently sent to all IRA accountholders a notice and form regarding changing income tax withholing, even if the accountholder is not taking any distributions. Their reasoning is below. Is this true? I have not seen such regulation.
They say they will be sending the form out twice a year.
Federal income tax regulations require IRA account holders to be informed of their right to waive or elect a different withholding rate prior to taking a distribution.
Thank you.
Permalink Submitted by Alan - IRA critic on Mon, 2024-09-09 17:09
The form is probably W4-R and the Notice is a TEFRA Notice. However, the actual withholding rules for IRA owners has not changed. The default rate is 10%, but the IRA owner can decline withholding entirely or elect a rate higher than 10% all the way up to 99%.
The IRS apparently thinks there is an under withholding problem, and IRA Custodians now have a possible secondary exposure to sanctions if they do not send out these forms. But custodians are reacting to this differently and what this particular custodian is doing appears to be overkill that generates additional costs. I think other custodians are handling this on line, but the real problem is that IRA distributions are inconsistent and therefore an IRA owner’s ideal withholding rate can change from one distribution to another.
The IRS collects underpayment penalties from individual taxpayers, therefore if a taxpayer is really concerned about that, then they need to make an effort to determine what the rate of withholding should actually be for each IRA distribution. Sending out all these Notices is not going to change this.