What Is the Tax Withholding Rate for an IRA?

IRA withholding reduces your tax bill in April.

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The rules for tax withholding on individual retirement accounts differ between federal income taxes and the various state income taxes. However, the withholding is just an estimate of what you owe. If you have too much withheld, you'll get a refund at the end of the year. But withhold too little, and you’ll get a bill with your tax return.

Your Choice for Federal

The Internal Revenue Service doesn’t mandate that money be withheld from IRA distributions for federal income taxes. Instead, you can choose your withholding rate based on the amount of tax you expect to owe on the distribution. For example, if you know you’re going to roll over the withdrawal into another IRA and therefore owe no taxes, you can opt out of federal tax withholding on the withdrawal. But if you’re expecting to pay 28 percent of the distribution in taxes, you can have 28 percent withheld to cover what you’ll owe at tax time.

Default Federal Rates

On your distribution request form, don’t forget to specify how much you want withheld -- or that you don’t want any withheld, if that’s the case. If you don’t specify how much you want withheld from your distribution for federal taxes, the default rate is 10 percent. For example, say you’re taking a $15,000 distribution. Unless you tell the financial institution otherwise, it will withhold $1,500 from your withdrawal.

Underwithholding Penalties

Don’t opt out of withholding if you know you'll owe taxes on the distribution. If you don’t have enough money withheld during the year, then at tax time you could face not only a hefty bill, but also underwithholding penalties. To avoid the penalties, you need to satisfy one of the safe harbors for withholding. If you have paid either at least 90 percent of what you owe for the current year or 100 percent (110 percent if your income is over $150,000 for joint filers or $75,000 for single filers) of what you owed the previous year, you’re safe.

State Rates

Each state sets its own rule for how much money must be withheld from your IRA distribution for state income taxes. Some states don’t have specific rules, but others require a minimum amount of withholding. For example, Iowa residents are subject to a 5 percent state tax withholding if federal taxes are withheld from the distribution. Wisconsin allows residents to elect withholding, and to specify the amount withheld.