Is there a reason why there is a default withholding for inherited Roth IRA RMD?

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Topic Author
gavinsiu
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Joined: Sun Nov 14, 2021 12:42 pm

Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by gavinsiu »

For inherited Roth IRA, one must withdraw a certain amount each year depending on your status. However, it was my impression that RMD from inherited ROTH IRA are tax free assuming that the accounts are over 5 years old. Why does brokerage default the fed tax at 10%?
Silk McCue
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Re: Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by Silk McCue »

It is tax free. Sounds like a system issue. Why doesn’t really matter.

Since it’s a default just override it.

Cheers
Topic Author
gavinsiu
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Re: Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by gavinsiu »

Silk McCue wrote: Wed Nov 23, 2022 7:59 pm It is tax free. Sounds like a system issue. Why doesn’t really matter.

Since it’s a default just override it.

Cheers
Thks I was worried that I might have missed something.
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celia
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Re: Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by celia »

gavinsiu wrote: Wed Nov 23, 2022 7:05 pm Why does brokerage default the fed tax at 10%?
I’m wondering if the account title has the word “Roth” in it but behind the scenes it is flagged as an Inherited TIRA.

To see if that is what happened, look at last year’s 1099-R for this account. In box 7, the Distribution Code is probably “4” (indicating the original owner has died). But next to it, there is a checkbox that indicates if the account is pre-tax or not. If it is checked, the custodian thinks it is a traditional IRA, regardless of the title of the account.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
gavinsiu
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Re: Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by gavinsiu »

My thought was that it just default to 10% for everything. I have never withdrawn from a Roth, so I am not entirely sure.
Alan S.
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Re: Is there a reason why there is a default withholding for inherited Roth IRA RMD?

Post by Alan S. »

There should not be any default 10% withholding on a Roth IRA distribution. Pub 590 B is no help because it does not address Roth IRA withholding and therefore infers that the TIRA withholding provision earlier in the Pub applies.

However, Sec 3405 of the tax code includes the following:
(1)Designated distribution
(A)In general
Except as provided in subparagraph (B), the term “designated distribution” means any distribution or payment from or under—
(i)an employer deferred compensation plan,
(ii)an individual retirement plan (as defined in section 7701(a)(37)), or
(iii)a commercial annuity.
(B)Exceptions
The term “designated distribution” shall not include—
(i)any amount which is wages without regard to this section,
(ii)the portion of a distribution or payment which it is reasonable to believe is not includible in gross income, and
(iii)any amount which is subject to withholding under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty, or
(iv)any distribution described in section 404(k)(2).
For purposes of clause (ii), any distribution or payment from or under an individual retirement plan (other than a Roth IRA) shall be treated as includible in gross income.
1) Sec 7701(a)(37) applies to TIRAs only (Sec 408a and 408(b). It does not include Roth IRAs (Sec 408(A).
2) Further it states that a Roth IRA (408A) distribution is not treated as includable in gross income (for withholding purposes).

However, some Roth custodians apparently do not wish to wade through Sec 3405, and it is easier for them to just treat a Roth distribution as if it were a TIRA distribution defaulting to 10% WH. You need to decline WH if you don't want it, even though you shouldn't have to.
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