Federal Withholding for U.S. and Non-U.S.-Based IRA Payees
By Agatha Schmidt, CISP, SDIP, CHSP
What is federal withholding?
IRA distributions are generally subject to federal income tax. Withholding is the act of setting aside a specified portion of an IRA distribution for the purpose of prepaying potential income taxes on that distribution at the time of the distribution. The financial organization withholds an amount elected by the payee (or otherwise applies statutory withholding requirements) from the distribution and remits the amount to the Internal Revenue Service (IRS). The payee can also waive federal withholding on IRA distributions entirely.
What are the statutory federal withholding requirements?
Tax withholding rules for distributions from retirement accounts (including IRAs) is found in Internal Revenue Code (IRC) Section 3405. Generally, taxable “on demand” IRA distributions are subject to federal tax withholding at a rate of 10 percent, unless the payee elects to withhold a different rate (any whole number from 0 to 100 percent may be elected). This means that financial organizations must apply a 10 percent withholding rate if a payee does not provide a withholding election. This general rule, however, may not apply if the payee resides outside the US.
What are the federal withholding rules if the payee is outside the US?
Final federal withholding regulations were released in Treasury Decision (TD) 10008 on October 21, 2024. They address withholding requirements for payments made outside the U.S. and provide the following.
Payees with a military or diplomatic address are treated as if their address is located within the physical U.S.
Withholding is required for payees with a physical U.S. address who provide payment instructions indicating that funds are to be delivered outside the U.S. (the payee must not be allowed to waive withholding).
A payor must withhold 10 percent for U.S. citizens or resident aliens whose residence address is located outside of the U.S.—even if the payment is to be delivered within the U.S. or if an address is not provided (the payee must not be allowed to waive withholding).
A payor must apply a 30 percent withholding rate to distributions made to a nonresident alien payee who does not provide a Form W-8BEN or Form W-8BEN-E specifying that a lower tax treaty rate applies.
Do these withholding rules apply to distributions from a Roth IRA?
Qualified Roth IRA distributions are generally not taxable. Nor are contribution or conversion amounts taxable under the Roth IRA ordering rules. However, withholding rules should be applied unless the financial organization is confident that a Roth IRA distribution is not subject to taxation.
