WH on an IRA Distribution

[pko1068366]

I was wondering if anyone has had any difficulty with IRS when WH a certain percentage to also account for the penalty that will be assessed later (under 59 1/2). I realize it is not required and "why give the government money early", etc., but does it pose any difficulty/confusion on the tax return?
Follow-up: If one chooses to WH more on the second distribution to account for the earlier one (penalty+taxes) is that also merely a "credit" issue that will be easily understood by the IRS?


Thanks.


pko

[alan-oniras]

pko,

There should be no difficulty in electing withholding percentages as long as the IRA custodian itself does not have limiting rules. Otherwise, the IRA owner should be able to elect any % they wish, up to 100%. The funds just go into one combined pot of withholding and the taxpayer can apply it to any tax liability showing on the 1040. There should also be no restriction in changing the % during the year. So the answer to your follow up question is Yes.

Of course, any withholding is considered to be applied equally throughout the year, therefore a late year IRA distribution withholding election can be used to make up for inadequate quarterly estimates earlier in the year. Taxpayers who are silent on withholding will likely end up with the default amount of 10% being applied. This can create problems with Roth conversions or rollovers by forcing the IRA owner to replace the withheld amount.