If you take a cash distribution from your IRA, you’ll have to pay income taxes on the taxable amount you withdraw unless you subsequently indirectly roll that money into another IRA or qualified plan.
In most cases, IRA cash distributions are subject to a default 10% federal withholding rate. However, the 10% rate may not be suitable for your tax situation. In that case, you have the option of choosing to have a higher rate withheld or to waive withholding altogether.
Regardless of your tax withholding election, your IRA distribution will be reported to the IRS on Form 1099-R.
How does withholding work?
Applying withholding to your IRA distribution is a prepayment of income taxes. The amount withheld will count as a credit toward your overall tax liability for the year. If too little tax is withheld, the IRS may assess penalties for underpayment.
If you have any questions on federal or state withholding related to your IRA distribution, it is best to consult with your tax advisor.
Is withholding required?
There are some cases where withholding will be required. For instance, certain states have minimum mandatory requirements for IRA distributions.
In addition, you cannot choose less than 10% federal withholding on any IRA distributions that are delivered outside the US. If you are a nonresident alien, you may be subject to a mandatory withholding rate of 30% unless you submit a properly completed W-8BEN and a valid tax treaty rate or exemption exists between the US and your country of residence.
Why do I have to make a withholding election?
You will be prompted to make a withholding election when you request a cash distribution. This is because distributions of pre-tax amounts from your traditional IRA and SEP IRA are generally subject to income tax, unless the amount is rolled over into another qualified retirement account.
While your Roth IRA contributions are considered after-tax amounts, certain distributions that include earnings, may be taxable if they are non-qualified.
Learn more about the forms you may need to file with the IRS here.
This article is for informational purposes only and is not intended to be construed as tax advice. You should consult a professional tax advisor to determine a strategy that fits your needs.