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Withholding on retirement account distributions
Old 12-22-2011, 09:04 AM   #1
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Withholding on retirement account distributions

The easiest approach when it comes to selecting the withholding on a distribution from your retirement account is to tick the box that asks not to withhold any federal tax and simply settle up with the IRS at the end of the year. However, I'm trying to understand the withholding rules for IRAs, 403b, 457 etc if you fail to make the election or if you are a US citizen that lives abroad in which case you cannot elect to have no tax withheld. Is anyone knowledgeable about the mandatory amounts your provider has to withhold?
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Old 12-22-2011, 09:11 AM   #2
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It's a good question and I don't have the answer.

I only have IRA's these days and only plan to have normal distributions (ie after age 59 1/2).

From the Fidelity site it says you can only elect to pay the taxes yourself IF you have a US address.

Quote:
What is my withholding percentage?

IRS regulations require Fidelity to withhold federal income tax at the rate of 10% from your total withdrawal unless your withdrawal is from a Roth IRA, or unless you elect otherwise. You can change your tax withholding percentage by entering any whole number between 10 and 99 or by electing not to have federal tax withheld (provided that you have supplied Fidelity with a U.S. address).
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Old 12-22-2011, 10:14 AM   #3
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It seems pretty simple in the IRA case, but the riles for 401k, 403b etc seem a lot more complicated. I was pondering if the 10% mandatory withholding from IRA income delivered to a US citizen living abroad could be overcome by using a tax treaty.......As you know tax in the UK is generally higher than in the US and the upshot of this is that after foreign tax credits I'd have zero tax due in the US, so could I make a treaty claim to make the withholding zero? It's a pain to have 10% withheld, pay say 25% in the UK, take the tax credit to zero out US tax and then have to claim a 10% refund from the IRS
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Old 12-22-2011, 10:53 AM   #4
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It seems pretty simple in the IRA case, but the riles for 401k, 403b etc seem a lot more complicated. I was pondering if the 10% mandatory withholding from IRA income delivered to a US citizen living abroad could be overcome by using a tax treaty.......As you know tax in the UK is generally higher than in the US and the upshot of this is that after foreign tax credits I'd have zero tax due in the US, so could I make a treaty claim to make the withholding zero? It's a pain to have 10% withheld, pay say 25% in the UK, take the tax credit to zero out US tax and then have to claim a 10% refund from the IRS
I would start by asking the provider first. As you know, in my case I had the opposite problem, of how to stop the bank, and the pension provider from witholding tax. In both cases they told me which forms to complete and file so that UK tax witholding was reduced to zero, so that I did not have to file a UK tax return each year to get a refund.

The US IRS may have a similar arrangement, or they may insist on filing since almost everyone in the US has to file a tax return each year anyway, and almost no-one in the UK has to file a return.
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Old 12-22-2011, 12:25 PM   #5
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My retired dad had some withholding from his IRA distribution but because his federal tax liability has been zero for the last several years, he always got a refund equal to what was withheld. I spoke to his Ameriprise financial advisor to ask her to stop the withholding and she said no problem. She told me she normally withheld federal income taxes from IRA distributions as a default unless told otherwise.

This happened after I explained to my dad that his tax refund would disappear (he was unhappy about that) but he quickly reversed course when I told him that he would be receiving that exact same money months earlier (when he could actually USE it more) and not have to wait for the tax refund.
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Old 12-22-2011, 07:53 PM   #6
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Originally Posted by scrabbler1 View Post
My retired dad had some withholding from his IRA distribution but because his federal tax liability has been zero for the last several years, he always got a refund equal to what was withheld. I spoke to his Ameriprise financial advisor to ask her to stop the withholding and she said no problem. She told me she normally withheld federal income taxes from IRA distributions as a default unless told otherwise.
If you are US resident you can choose to have no tax withheld. But if you are a US citizen living abroad you can't choose no withholding. So if you have zero US tax liability because of foreign tax credits you end up getting a the withholding as a refund.

I'm interested in what are the default withholdings for a US citizen living overseas....it's 10% on an IRA, but I'm confused about the amounts for all the other retirement accounts I have. I had though of just rolling them over to an IRA, but I'd have to keep things separate as some are from Government work and some from private employers and those are taxed differently under the US/UK tax treaty.........I need tax reform now
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Old 01-31-2012, 09:51 AM   #7
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From what I"m reading on this thread, it seems that you don't have to have withholding on an IRA withdrawal. (?)

I just cleared the 59 1/2 gate in Dec (yay!) and my accountant told me to withhold. Now he says that my refund is slightly more than what I withheld (yay!).

Can you not withhold even for a large withdrawal and pay at tax time? I thought there was some sort of penalty if you did that (?)
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Old 01-31-2012, 10:03 AM   #8
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Originally Posted by marko View Post
Can you not withhold even for a large withdrawal and pay at tax time? I thought there was some sort of penalty if you did that (?)
You'll likely pay a penalty if you don't either withhold or pay quarterly estimated taxes. I prefer withholding as payying quarterly is a pain by comparison. I take a look at my estimated taxes early in the 4th quarter of each year and adjust my withholding to make sure I'm not substantially over/under what I'll owe.
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Old 01-31-2012, 10:09 AM   #9
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You'll likely pay a penalty if you don't either withhold or pay quarterly estimated taxes. I prefer withholding as payying quarterly is a pain by comparison. I take a look at my estimated taxes early in the 4th quarter of each year and adjust my withholding to make sure I'm not substantially over/under what I'll owe.
Thanks! So, in effect, there's a penalty for not giving them money that they're not supposed to have.
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Old 01-31-2012, 10:26 AM   #10
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Thanks! So, in effect, there's a penalty for not giving them money that they're not supposed to have.
That's not the way I see it but opinions do vary.
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Old 01-31-2012, 10:58 AM   #11
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That's not the way I see it but opinions do vary.
What I mean is, there's a penalty if you don't give them the money, but six months later they send you back the same amount without interest.

Obviously, they're not entitled to that money if they're returning to you, but they're penalizing you if you don't give it to them.

What happened to "fairness"??
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Old 01-31-2012, 11:05 AM   #12
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What I mean is, there's a penalty if you don't give them the money, but six months later they send you back the same amount without interest.

Obviously, they're not supposed to have that money if they're returning to you.
You are only penalized if you fail to pay quarterly or withhold approximately what you'll owe at year end. If you know you'll owe nothing, there is no penalty for not paying/withholding as you go.

Here's the rules straight from the IRS: http://www.irs.gov/pub/irs-pdf/p505.pdf
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Old 01-31-2012, 11:09 AM   #13
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Thanks! My original question was based on my accountant telling me to withhold, only to find out that I was getting back slightly more than I withheld.
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Old 01-31-2012, 11:37 AM   #14
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Thanks! My original question was based on my accountant telling me to withhold, only to find out that I was getting back slightly more than I withheld.
Sounds like your accountant got it right. I'd rather get or owe a little than either withhould way too much, or worse, withhold way too less to the point of having a big tax bill plus a penalty to pay.
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Old 01-31-2012, 11:38 AM   #15
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I don't have anything withheld from my TSP (=401K) distributions or my tiny pension. Instead I pay quarterly estimated taxes, both federal and state, on income from TSP, pension, and my taxable dividends.

I have had no penalties and get only a slight refund at tax time.
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Old 01-31-2012, 11:46 AM   #16
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We go with 20 percent on all distributions from the IRA and just don't care that we overpay and then get a refund.

Marko, why don't you just ask your accountant about this? ("My original question was based on my accountant telling me to withhold, only to find out that I was getting back slightly more than I withheld.")
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Old 01-31-2012, 12:51 PM   #17
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We go with 20 percent on all distributions from the IRA and just don't care that we overpay and then get a refund.

Marko, why don't you just ask your accountant about this? ("My original question was based on my accountant telling me to withhold, only to find out that I was getting back slightly more than I withheld.")
Why don't I ask him? Well.........I'm slowly discovering the marvels of TurboTax. I did a trial with it this week before I see my accountant next week and I plan to do a comparison on the results.

Coupled to the great info I seem to get on this forum, I'm beginning to wonder why I pay him $800 to do my taxes.

So, you might say that I'm testing the waters of dumping this guy even though he is available 3-4 times a year for other $ questions (which folks here seem to be as knowledgeable).

My financial life has gotten considerably less complicated since RE with less stocks/options/etc to deal with.
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Old 01-31-2012, 01:15 PM   #18
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I am currently doing withdrawals from my 401K until I reach 59 1/2. I don't have an option to not have taxes withheld and the least amount they will withhold is 20% which is way over what I will owe.

I was able to change my pension to not have any Federal withheld, but it still won't offset it enough. I really wanted to not have any taxes withheld and pay quarterly, but I'm stuck with this until I can get access to my IRA.
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Old 01-31-2012, 01:24 PM   #19
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We go with 20 percent on all distributions from the IRA and just don't care that we overpay and then get a refund.

That's pretty much the way I plan to do it...
I'm hoping that will cover my fed & state (LA) taxes. I expect to be in a 15% bracket for federal.
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