Withholding IRA Distributions

Any excess IRA tax withholding is returned to you when you file your return.
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Individual retirement arrangements allow you to take money out any time you want, whether you're taking a permanent withdrawal or planning to roll the money into another retirement account. The rules for withholding from an IRA distribution are the same regardless of whether you're taking a qualified distribution or an early withdrawal.

Federal Withholding Optional

You have complete control if over how much money you have withheld from your IRA distribution, even if it's an early withdrawal. You can specify a specific percentage of withholding from the withdrawal or opt out of withholding completely. Alternatively, if you don't give any indication as to how much you want withheld, your financial institution uses the default 10 percent withholding. Say you request a $6,000 distribution from your IRA, but don't make an election as to how much to withhold. Your financial institution will automatically withhold $600.

State Withholding

State tax withholding varies depending on where you live, because each state has its own rules. Some states require a certain percentage of withholding if any money is withheld for federal taxes. For example, both Kansas and Oklahoma require 5 percent withholding if any federal taxes are withheld. Others require state withholding regardless of federal withholding. For example, North Carolina requires an automatic 4 percent withholding unless you opt out.


The amount you elect to have withheld should reflect your estimated tax bill -- including any early withdrawal penalties. For example, say you're going to roll the money into another IRA so you won't have any taxes due. That's a perfect time to opt out of withholding. On the other hand, if you're expecting to pay income taxes and the 10 percent early withdrawal penalty on the distribution, opting out of withholding will leave you with a big tax bill when you file your tax return.


If you have too little withheld from your IRA withdrawal, you could face interest and penalties on top the tax bill you owe. The IRS requires that you meet one of two options for satisfying your withholding requirements. First, you're safe if your total withholding equals at least 90 percent of your tax bill for the current year. Second, you're also safe if your total withholding equals 100 percent of your prior year's tax bill. That figure is increased to 110 percent if your income exceeds $75,000 if you're married filing separately or $150,000 for any other filing status.

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