IRA Distributions and State Income Tax Withholding
  • Insights

  • IRA Distributions and State Income Tax Withholding

    Mark Campbell Insights

    Mark Campbell

    Published July 20, 2015

    Overview

    Many financial organizations are familiar with the rules governing federal income tax withholding as it applies to individual retirement account (IRA) distributions, however most are not familiar with the rules governing state income tax withholding on IRA distributions. In general:

    • State income tax withholding applies to traditional IRA distributions
    • Though Roth IRA distributions are generally not subject to state income tax withholding, a taxable Roth IRA distribution may be subject to state income tax withholding
    • Financial organizations that disburse IRA “payments” may be required to collect state withholding if the “payment” is expected to be taxable
    • An IRA distribution recipient’s state of residence is considered the residency of the IRA for applying state income tax withholding rules
    • Only financial organizations that are subject to the state taxation jurisdiction are required to withhold state income tax from an IRA distribution
    • Financial organizations over which a state does not have state taxation jurisdiction are not required to withhold state income tax from an IRA distribution
    • If a financial organization does not fall under the state taxation jurisdiction of a recipient’s residency, the recipient may request to have state income tax withheld but the financial organization is not required to do so. For example, a financial organization located in Iowa must follow the state income tax withholding rules for residents of Iowa, but would not have to follow the state income tax withholding rules for a resident of Arkansas that takes a distribution from an IRA at a financial organization located in Iowa

    State Withholding Categories

    With 51 states and jurisdictions, withholding requirements vary and each state (or jurisdiction) falls into one of the following categories:

    • State income tax withholding is not available
    • State income tax withholding is voluntary
    • State income tax withholding is mandatory unless the individual elects to waive state income tax withholding
    • State income tax withholding is mandatory when federal withholding applies or is elected, unless the individual elects to waive state income tax withholding
    • State income tax withholding is mandatory when federal withholding applies or is elected
    • State income tax withholding is mandatory

    There are 10 states in which state income tax withholding for IRAs is not available (i.e., no withholding):

    • Alaska
    • Florida
    • Hawaii
    • Nevada
    • New Hampshire
    • South Dakota
    • Tennessee
    • Texas
    • Washington
    • Wyoming

    There are 29 states in which state income tax withholding for IRAs is voluntary:

    • Alabama
    • Arizona
    • Colorado
    • Connecticut
    • Delaware
    • Georgia
    • Idaho
    • Illinois
    • Indiana
    • Kentucky
    • Louisiana
    • Maryland
    • Minnesota
    • Mississippi (if age 59½ or older)
    • Missouri
    • Montana
    • Nebraska  (if younger than age 59½)
    • New Jersey
    • New Mexico
    • New York
    • North Dakota
    • Ohio
    • Pennsylvania
    • Rhode Island
    • South Carolina
    • Utah
    • Virginia
    • West Virginia
    • Wisconsin

    There are five states in which state income tax withholding is mandatory unless the individual elects to waive state income tax withholding (i.e., required unless waived):

    • Arkansas
    • Kansas
    • Michigan
    • Oregon
    • Vermont

    There are two states in which state income tax withholding is mandatory if the individual did not waive federal withholding, unless the individual waives state income tax withholding (i.e., required with federal withholding unless waived):

    • California
    • North Carolina

    There are five states in which state income tax withholding is mandatory if the individual did not waive federal withholding (i.e., required with federal withholding):

    • Iowa
    • Maine
    • Massachusetts
    • Nebraska (if age 59½ or older)
    • Oklahoma

    There are two jurisdictions where state income tax withholding is mandatory:

    • Mississippi (if younger than age 59½)
    • Washington D.C.

    State Withholding Forms

    • Some states have a specific form that must be completed by the recipient to make an election for state income tax withholding
    • Some states allow for the use of IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments
    • States that do not have a specific form allow an election to be made in a mutually acceptable format

    State Withholding Remittance and Reporting

    • Remittance of withheld taxes from IRA distributions generally follows the state income tax wage withholding remittance rules
    • Most states also prefer, or require, electronic payment of withheld amounts
    • Generally, the higher the amount of tax withheld during a period the more frequently it must be remitted to the state
    • Most states require quarterly and annual withholding reports to be submitted
    • Most states also require separate filing of IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., when state income tax has been withheld. This includes some states that participate in the Combined Federal/State Withholding program.

    For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts, consider joining us for one of our Live Streaming events which are offered on a variety of IRA related topics. Click here for more information on training opportunities available to you, or you can call us at 1-800-552-9408.



  • Please take a moment and tell us what you think of our content.