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March 6, 2009

What is the least amount that can be withheld for tax from my distribution?

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What is the least amount that can be withheld for tax from my distribution?

Question I requested a http://retirementdictionary.com/definitions/distribution distributionof $20,000 from my retirement account and elected to have 7% withheld for federal tax. However, the custodian withheld 10% without my permission and informed me that they are required withhold 10%. Is that true?

Answer

It depends. Distributions from your retirement account are subject to withholding rules. However, the withholding rules that apply depends on if the distribution represents a http://retirementdictionary.com/definitions/periodicpayment periodic payment or a http://retirementdictionary.com/definitions/nonperiodic-payment-nonperiodic-distribution non-periodic payment. Additionally, the payer may be required to apply a minimum withholding of 20% if the distribution is made from a http://retirementdictionary.com/definitions/qualifiedretirementplan qualified plan http://retirementdictionary.com/definitions/403bplan 403(b), or http://retirementdictionary.com/definitions/457plan 457(b) plan. For this purpose, periodic payments are defined as payments from a pension plan that are spread out over more than one year (periodic payments). Non-periodic payments are ad-hoc one-time distributions or distributions paid within one-year.

For periodic payments from a pension or http://retirementdictionary.com/definitions/annuityorannuitycontract annuity, the withholding amount is calculated using the same method that is used to determine withholding from salaries and wages, and you would simply instruct the payer on how much to withhold.

For non-periodic payments, the following applies:

• If the distribution is made from a http://retirementdictionary.com/definitions/traditionalira traditional IRA, http://retirementdictionary.com/definitions/simplifiedemployeepensionsepira SEP IRA, or http://retirementdictionary.com/definitions/simpleira SIMPLE IRA, the amount withheld for federal tax must be zero, 10% or more than 10%. As such, your IRA custodian did the right thing
• If the distribution was made from a http://retirementdictionary.com/definitions/rothira Roth IRA, withholding applies only to the taxable portion of the distribution, and the traditional IRA rules(above) would apply. However, a custodian may be unable to ascertain how much of a Roth IRA distribution is taxable
• If the account is a qualified plan, 403(b) or 457(b) plan, the following withholding rules apply
o If the amount is http://retirementdictionary.com/definitions/eligiblerolloverdistributionerd rollover eligible and is processed as a http://retirementdictionary.com/definitions/eligiblerolloverdistributionerd direct rollover to an eligible retirement plan, no withholding applies
o If the amount is rollover eligible and is paid to you, the payer is required to withhold at least 20% for federal taxes
o If the amount is not rollover eligible, the minimum withholding amount is 10%, unless you elect zero withholding.

The payer may also perform State tax withholding in addition to any federal tax withholding. Special rules apply to amounts that are sent overseas. These are explained in IRS Publication 515, available at http://www.irs.gov

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 http://irapublications.com. 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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