What You Need to Know About Withholding and Your IRA

By Sarah Brenner, JD
Director of Retirement Education

If you take a distribution from your traditional IRA, in most cases you will owe taxes. The government wants to be sure those taxes are paid, so IRA distributions are subject to federal income tax withholding. The good news is that there is a lot of flexibility when it comes to withholding on your IRA distribution. Here is what you need to know.

How Withholding Works

Your IRA custodian is required to apply federal income tax withholding rules to a traditional IRA distribution when more than $200 is distributed from your IRA in a year. Roth IRA distributions generally are not subject to withholding. When you take a distribution from your IRA, the custodian must provide you with a withholding notice explaining the rules prior to the distribution.

Unless your IRA distribution is from an IRA annuity that has been annuitized, your withholding choices are to withhold 0%, 10%, or more than 10%. You can even choose to have 100% of your IRA distribution withheld! If you don’t choose, the choice will be made for you. If you do not choose anything after being notified, the custodian must withhold 10%. You should be aware that the 10% rule even applies to distributions that are converted to Roth IRAs. Be sure to elect 0% withholding if you want to convert an entire traditional IRA distribution to a Roth IRA. If any amounts are withheld, they will not be considered to be converted to the Roth IRA.

Withholding applies differently to annuitized distributions from an IRA. For these distributions, withholding applies as if the payments were wages. You can elect out of withholding on distributions from your annuitized IRA.

How Much Should I Withhold?

Your IRA custodian is required to inform you about withholding, but the custodian is not required to tell you how much you should actually withhold. How much should be withheld from your IRA distribution is based on your overall tax situation. You should consider a number of factors, such as total anticipated income, deductions, credits and other withholdings.

You may be subject to penalties for not paying enough federal income tax during the year, either through withholding or estimated tax payments. Withholding is automatically treated as being paid in ratably, throughout the year. This can be a benefit for you if you take an IRA distribution late in the year and are concerned that you may not have made high enough quarterly payments. You can choose to withhold on the IRA distribution to make up the shortfall.

Some taxpayers mistakenly equate their withholding with the tax they owe, but that, of course, is not usually the case. For example, if you withhold 10% from your IRA distribution, that does not necessarily mean you will owe 10% in taxes. You could owe 10%, but you could also owe less than 10% or, most likely more than 10% — potentially much more. For 2024, the federal 10% tax bracket only applies to taxable income from $0 to $11,600 for single filers and $0 to $23,200 for those married and filing joint returns. Therefore, withholding only 10% of an IRA distribution for federal income taxes could easily result in you owing additional amounts at tax time.

Withholding can be complicated. You will want to keep in mind that federal withholding is only part of the picture. Many states also require withholding on IRA distributions. If you have questions, you will want to discuss your situation with a knowledgeable financial advisor.