IRA withholding reduces your tax bill in April.
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.