Are there specific tax withholding rules by state?

State tax withholding rules on IRA distributions vary from state to state. State withholding applies (depending on the state) to both distributions and removals of excess contributions.

States that have mandatory state tax withholding on distributions include Arkansas, California, Connecticut, Delaware, Iowa, Kansas, Maine, Massachusetts, Michigan, Minnesota, North Carolina, Oklahoma, Oregon, Vermont, Washington D.C.

      • While some “mandatory” states may have some special exceptions to withholding, Betterment does not currently support any special exceptions to withholding in these states. Additionally, some “mandatory” states may have variable minimum withholding requirements depending on income or other factors. Betterment applies a single withholding rate for all distributions, notwithstanding any such requirements.

What does tax withholding look like for these mandatory states?

For distributions from Traditional or SEP IRAs, if you live in mandatory states, you are required to withhold at least the state’s minimum amount. Withholding on Roth is optional, but if you choose to do withholding, it must be for at least the state’s minimum amount. The same rules apply to inherited IRAs.

What does tax withholding look like for states where this is not mandatory?

Some states have prohibited any state tax withholding on distributions.

States where state tax withholding is not allowed include: Alaska, Florida, Hawaii, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.

Some states have voluntary state tax withholding on distributions, but Betterment is not able to support this option for all of them at this time.

States that allow for voluntary state tax withholding that Betterment supports include: Arizona, Colorado, Maryland, Nebraska, New Jersey, New York, Virginia. If you live in one of these voluntary states, you can withhold from 0%-100% on an IRA distribution from a Traditional, SEP, or Roth IRA.

States that allow for voluntary state tax withholding that we cannot support include: Georgia, Idaho, Illinois, Indiana, Kentucky, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Ohio, Pennsylvania, Rhode Island, South Carolina, Utah, West Virginia, Wisconsin.

Please note that if you change your residential address while you have a pending IRA withdrawal, it will not change the state withholding destination on this pending withdrawal.

Betterment is not a tax advisor, and the information provided here should not be construed as tax advice. It should only be used for informational purposes. Please consult a qualified tax professional to determine the rules that apply to your individual tax situation.