When you request your required minimum distribution, you’ll be asked a simple question that has a real impact on your tax year: how much, if any, do you want withheld for taxes?
It’s easy to check a box without much thought. But choosing the right withholding can help you avoid a surprise tax bill in April, reduce the need for quarterly estimated payments, and even help with an underpayment you didn’t see coming. Here’s what you need to know.
Are RMDs Taxable?
For traditional, SEP, and SIMPLE IRAs, and the pre-tax portion of 401(k) plans, yes. Your RMD is generally taxed as ordinary income in the year you take it.
Withholding doesn’t change how much tax you owe. It simply determines when and how you pay it. Any amount withheld is sent to the IRS on your behalf and credited toward your tax bill for the year.
The Default: 10% Federal Withholding
For a one-time IRA distribution, like a typical RMD, federal tax is withheld at 10% by default unless you choose otherwise.
You can change that by completing IRS Form W-4R, which lets you choose any withholding rate from 0% to 100%. Some people elect no withholding at all and pay their taxes another way, while others choose a higher rate to cover their full tax bill.
If you receive your RMD as regular monthly or quarterly payments instead of a single distribution, a different form and withholding approach may apply. MidAtlantic IRA can confirm which form applies to your distribution schedule.
Withholding Still Counts Toward Your RMD
Here’s a question we hear often: if taxes are withheld, did I still take my full RMD?
Yes. Your RMD is satisfied by the total, or gross, amount distributed, including anything withheld. For example, if your RMD is $20,000 and you elect 15% federal withholding, $3,000 goes to the IRS and $17,000 goes to you. Your full $20,000 RMD is complete.
How to Choose Your Withholding Rate
There’s no single right answer, but these questions can help:
- What’s your tax bracket? Form W-4R includes a simple table to help you estimate a rate based on your expected income.
- Do you have other income? Social Security, pensions, rental income, and business income all add to your tax picture. If little or no tax is withheld from those sources, your RMD withholding can help fill the gap.
- Do you already make estimated payments? If you pay quarterly estimated taxes, you may choose little or no withholding and include your RMD in your estimates instead.
- Would you rather keep it simple? Some retirees prefer to have enough withheld from their RMD that they don’t need to think about estimated payments at all.
Your CPA can help you pick a rate that fits your full tax picture.
A Helpful Year-End Strategy
Here’s a lesser-known benefit. The IRS generally treats tax withheld from retirement distributions as if it were paid evenly throughout the year, no matter when it was actually withheld.
That means if you take your RMD in December and have a larger amount withheld, it can help cover a shortfall from earlier in the year and may reduce or eliminate an underpayment penalty. If you’ve fallen behind on estimated payments, this is worth discussing with your tax advisor before year end.
Don’t Forget State Taxes
State tax rules vary widely. Some states have no income tax, some require withholding on retirement distributions, and others leave it up to you. [Note which states MidAtlantic IRA can withhold for, and how to request state withholding.] If your state taxes retirement income, check with your tax advisor about whether withholding or estimated payments make more sense.
Special Situations
- In-kind distributions. If you take your RMD in the form of property, like a percentage of real estate or a portion of a note, there’s no cash to withhold from. You’ll typically either elect no withholding and plan to pay the tax separately, or take a small cash distribution alongside the property to cover withholding.
- Qualified charitable distributions. If you’re 70½ or older and send part of your RMD directly to a qualified charity, that portion isn’t taxable, so no withholding applies to it.
- Changing your mind. You can generally update your withholding election for future distributions by submitting a new form.
Where to See Your Withholding
After year end, you’ll receive Form 1099-R showing the total amount distributed and any federal tax withheld. You’ll use it when filing your tax return, so keep it with your other tax documents.
How MidAtlantic IRA Can Help
When you request your RMD, our team will walk you through the withholding election and the forms involved so you can make a choice that fits your plans.
Because the right withholding depends on your full tax situation, we always recommend checking with your CPA or tax advisor. MidAtlantic IRA doesn’t provide tax, legal, or investment advice, but we’re happy to help you understand your options.
Have questions about your RMD withholding? Schedule a call with our team and we’ll help you get set up.
Additional Resources
Should I Take My RMD in a Lump Sum or Monthly Withdrawals?
How MidAtlantic IRA Processes Required Minimum Distributions
Using Qualified Charitable Distributions to Satisfy Your RMD
Taking Your RMD In-Kind: How to Distribute Real Estate, a Note, or an LLC Interest Instead of Cash