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December 15, 2010

Withholding Tax (Tax Withholding)

Your Guide



Amounts withheld from distributions paid to an owner or beneficiary, from an IRA or employer plan account.

Rules for Withholding Tax

The rules for withholding vary, depending on the type of retirement account. In general:
  • Withholding from IRA distributions is voluntary, which means that the IRA owner or beneficiary can choose whether or not to have taxes withheld. Except for annuities, federal withholding from IRA distributions must be at least 10% of the gross distribution amount.
  • Withholding from a qualified plan, 403(b) and governmental 457(b) distribution is determined by whether the amount is rollover eligible, and if so, whether the amount is paid to the IRA owner or beneficiary, or directly rolled over to an eligible retirement account.  If the amount is rollover eligible, and is paid directly to the participant, the payor must withhold 20% for federal income tax. If the amount is directly rolled over, the mandatory 20% withholding does not apply. For amounts that are not rollover eligible, withholding is voluntary.
Generally, except for earnings on return of excess contributions, distributions from Roth IRAs are not subject to withholding.
Some payors perform state tax withholding. The rules for state tax withholding vary amount states.
Referring Cite
IRC § 3405, IRS Form W-4P, IRS Pub 505
Additional Helpful Information
  • Withholding rules differ for distributions sent out of the United States
  • Periodic payments. Withholding from periodic payments of a pension or annuity is figured in the same manner as withholding from wages. Periodic payments are made in installments at regular intervals over a period of more than 1 year. They may be paid annually, quarterly, monthly, etc.  Form W-4P
  • Unless you are a nonresident alien, withholding is required on any periodic or nonperiodic payments that are delivered to you outside the United States or its possessions. You cannot choose not to have federal income tax withheld
  • If amounts are withheld from a distribution that is later rolled over, you may make-up the withheld amount out-of-pocket.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.


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