Popular Withholding Strategy for IRA RMDs

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Withholding on Required Minimum Distributions

Withholding more federal income tax on required minimum distributions from traditional IRAs is a popular tax strategy. Under the federal income tax rules, tax withheld at any point in the year is treated as if evenly paid throughout the year. Some retirees rely on this rule to avoid paying estimated taxes and instead have taxes that they expect to owe for the year withheld from an RMD from a traditional IRA.

In fact, Kiplinger regularly advises retirees who are falling short on their withholding to have more tax withheld from a year-end distribution from their traditional IRAs. Note that by default, the IRA custodian will withhold 10% of the payout for taxes. So if you want more tax withheld from an IRA payout, you’ll need to request it.

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Roth IRA Conversions

The above strategy doesn’t work as well with Roth IRA conversions, tax advisers tell us. When you convert a traditional IRA to a Roth, the conversion is treated under the income tax rules as a taxable distribution of the IRA funds to you, and the IRA custodian will by default withhold 10% tax from the converted funds. But understand that the 10% tax withheld is also treated as a distribution to you on which you’d have to pay tax, in addition to the funds you’re moving to the Roth.

And, if you’re younger than 59½ when you do the Roth IRA conversion, you’ll have to wait at least five years after the conversion to withdraw funds to avoid being slapped with a 10% early withdrawal penalty. That’s why experts say to pay the tax owed on a Roth conversion with non-IRA funds and request that the custodian withhold 0% from the converted IRA funds.

This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.

Joy is an experienced CPA and tax attorney with an L.L.M. in Taxation from New York University School of Law. After many years working for big law and accounting firms, Joy saw the light and now puts her education, legal experience and in-depth knowledge of federal tax law to use writing for Kiplinger. She writes and edits The Kiplinger Tax Letter and contributes federal tax and retirement stories to kiplinger.com and Kiplinger’s Retirement Report. Her articles have been picked up by the Washington Post and other media outlets. Joy has also appeared as a tax expert in newspapers, on television and on radio discussing federal tax developments.