IRA Withholding for 2012

Monday, November 05, 2012

By Joe Cicchinelli, IRA Technical Expert

Follow Me on Twitter: @JoeCiccEdSlott

If you are an IRA owner or an IRA beneficiary, you will have to make a federal income tax withholding choice when you take a distribution. The reason you have to make a withholding choice is because IRA distributions are taxable. In most cases, the withholding election is built into the withdrawal form provided by the custodian. You can be penalized for underestimating your tax liability.

Withdrawals from IRAs, including SIMPLE and SEP IRAs, are subject to federal income tax withholding, but distributions from Roth IRAs are not. If you choose to withhold, that amount is used as a credit towards any federal income taxes you will owe on the distribution. If you want to roll over the entire amount of the IRA distribution, then you would likely choose zero withholding because the rollover is tax free.

Transfers between IRAs and recharacterizations are not treated as distributions and thus are not subject to the withholding rules. Also, withholding is not required on total IRA distributions of less than $200.

You must pick from one of three choices of withholding; 0%, 10%, or an amount larger than 10%. Generally, IRA distributions are subject to federal income tax withholding at a flat rate of 10%. However, you can choose zero withholding or an amount larger than 10%. You can even choose to have 100% of the distribution amount withheld. For example, the reason you might choose 100% withholding is because you have not withheld enough income taxes in 2012 on prior IRA distributions or other taxable income, such as wages. There is no option to choose a withholding rate between 0% – 10%.

Annuitized distributions from IRA annuities or from annuity contracts under an IRA are subject to different withholding rules. Withholding applies as if the payments were wages, rather than the 10% rate. You wil have to make a withholding election with the custodian. If you don’t, then tax will be withheld as if you are married claiming three exemptions. This rule applies even if you are not married. You can also choose zero withholding.

Article Highlights: 

  • IRA distributions are subject to federal income tax withholding
  • You must chose to withhold 0%, 10% or any amount larger than 10%
  • IRA annuities are subject to withholding as wages 

 

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