How much federal tax should i withhold from my ira distribution

IRA withholding reduces your tax bill in April.

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The rules for tax withholding on individual retirement accounts differ between federal income taxes and the various state income taxes. However, the withholding is just an estimate of what you owe. If you have too much withheld, you'll get a refund at the end of the year. But withhold too little, and you’ll get a bill with your tax return.

Your Choice for Federal

The Internal Revenue Service doesn’t mandate that money be withheld from IRA distributions for federal income taxes. Instead, you can choose your withholding rate based on the amount of tax you expect to owe on the distribution. For example, if you know you’re going to roll over the withdrawal into another IRA and therefore owe no taxes, you can opt out of federal tax withholding on the withdrawal. But if you’re expecting to pay 28 percent of the distribution in taxes, you can have 28 percent withheld to cover what you’ll owe at tax time.

Default Federal Rates

On your distribution request form, don’t forget to specify how much you want withheld -- or that you don’t want any withheld, if that’s the case. If you don’t specify how much you want withheld from your distribution for federal taxes, the default rate is 10 percent. For example, say you’re taking a $15,000 distribution. Unless you tell the financial institution otherwise, it will withhold $1,500 from your withdrawal.

Underwithholding Penalties

Don’t opt out of withholding if you know you'll owe taxes on the distribution. If you don’t have enough money withheld during the year, then at tax time you could face not only a hefty bill, but also underwithholding penalties. To avoid the penalties, you need to satisfy one of the safe harbors for withholding. If you have paid either at least 90 percent of what you owe for the current year or 100 percent (110 percent if your income is over $150,000 for joint filers or $75,000 for single filers) of what you owed the previous year, you’re safe.

State Rates

Each state sets its own rule for how much money must be withheld from your IRA distribution for state income taxes. Some states don’t have specific rules, but others require a minimum amount of withholding. For example, Iowa residents are subject to a 5 percent state tax withholding if federal taxes are withheld from the distribution. Wisconsin allows residents to elect withholding, and to specify the amount withheld.

References

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Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

During your working years, managing your tax withholding is pretty straightforward. Your paycheck is likely your main source of income, and once you've submitted your W-4, you probably don't think much about the amount you're setting aside for taxes—so long as it's enough to cover your tax bill. 

Once you retire, however, tax planning can become more complicated.

"In retirement, your income will likely be drawn from multiple sources—and each source may have different tax withholding rules," says Hayden Adams, CPA, CFP®, and director of tax planning at the Schwab Center for Financial Research.

Here's how federal tax withholding generally works for some common sources of retirement income (state withholding may also apply):

• Traditional, SEP, and SIMPLE IRAs: Unless you specify otherwise, your plan's custodian will withhold 10% on taxable distributions. Generally speaking, you can change or eliminate your withholding at any time by reaching out to your individual retirement account (IRA) custodian.
• 401(k), 403(b), and other qualified workplace retirement plans: Plan providers typically withhold 20% on taxable distributions—unless the withdrawal is made to satisfy the annual required minimum distributions (RMDs) mandated by the IRS, which conform to IRA withholding rules.1
• Annuities and pensions: Taxable, periodic (e.g., weekly or monthly) payments from annuities and pensions are treated as wages using the IRS withholding tables in Publication 15. You can set up or change your withholding by submitting Form W-4P to the payer.
• Social Security: Withholding isn't required on Social Security payments, but a portion of your benefits may be taxable, depending on your income. You can set up or change your withholding by submitting Form W-4V to the Social Security Administration.
• Taxable bank or brokerage accounts: In most instances, taxes are not withheld from capital gains, distributions, or other income generated from such accounts.2 However, you may want to withhold more elsewhere or pay quarterly estimated taxes to help cover any tax liabilities produced by these assets.

If you're unsure how much you should have withheld each year, you can use the IRS' Tax Withholding Estimator to calculate your overall tax obligation.

"That said, your estimated tax obligation is just that—an estimate—and will not account for any fluctuations in income throughout the year," Hayden says. As a result, it's wise to work with a tax professional. He or she may even recommend you make quarterly estimated tax payments in addition to the amounts already being withheld. "That way, you won't end up underpaying the IRS throughout the year, which could result in penalties," Hayden says.

1If your 70th birthday was July 1, 2019, or later, you do not have to take withdrawals until you reach age 72. Roth IRAs do not require withdrawals until after the death of the owner. 

2Certain taxpayers may be subject to backup withholding, which requires a payer to withhold tax from payments not otherwise subject to withholding. Learn more about backup withholding.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.