How to Withhold Taxes on IRA Distributions
Learn more about how you can set up withholding from your IRA distributions, so that we can send taxes directly to the IRS on your behalf.
TABLE OF CONTENTS
- What is IRA tax withholding?
- Are there specific tax withholding rules by state?
- How can I set up tax withholding?
- Why would I choose to withhold more than the default 10% on federal withholding?
- Can I change my withholding percentage after I have submitted a withdrawal request?
- Is there a way to check my tax withholding history?
- Is there a way to check the status of my tax withholding?
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.
What is IRA tax withholding?
Tax withholding is the percentage of income tax that you elect to have withheld from your IRA distribution and sent directly to the IRS in an effort to mitigate your future tax liability.
The amount you withhold, if any, may differ from your ultimate tax liability. If your withholding ends up being too much, you will be due a refund when you file your tax return. If your withholding ends up being too little, you will owe an additional amount to the government when you file your tax return.
Are there specific tax withholding rules by state on IRA distributions?
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, 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.
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, Minnesota, 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.
How can I set up tax withholding?
When you initiate a distribution from your IRA, you will automatically be prompted to choose a state and/or federal tax withholding amount. All customers will be defaulted to 10% federal withholding, but can select 0% or any other value between 10% and 100%.
Why would I choose to withhold more than the default 10% federal withholding?
Customers commonly use the IRA withholding process to meet future tax obligations from other sources of income such as: capital gains, dividends, rental income, and self-employment income.
Example: Bob is 62 and runs a consulting business. He withdraws $20,000 from his Roth IRA, which he opened when he was 50. He doesn’t owe any tax on this withdrawal because he is over age 59.5, and his account has been open for at least 5 years. Even though Bob’s Roth distribution is tax-free, he could still elect to withhold the entire $20,000 (100%) to cover taxes he expects to owe on $50,000 in self-employment income from his business.
Can I change my withholding percentage after I have submitted a withdrawal request?
No. Once the distribution has been requested, the election is final. If the withholding ends up being too much or too little, there will be a reconciliation when filing your tax return the following year.
Is there a way to check my tax withholding history?
Yes, you can view records of previous tax withholdings on Activity. You will also receive a confirmation email that contains a breakdown of the amount withheld, including state vs. federal withholding, and the amount being sent to your linked bank account.
A 1099-R tax form will also be generated by January 31 of the following year, which will show your IRA state and/or federal tax withholding total for the year.
Is there a way to check the status of my tax withholding?
Pending transfers will be noted on Manage Transfers with both the amount withheld for the IRS and the amount going to the customer’s bank account. Once the transfer is complete, a record will be posted on Activity.
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