IRA inheritence contributrion asking taxes to be taken out prior to distibution

[jmig703]

My spouse has an inherited tradtional IRA from a deceased brother. The ira was $32,000 in 2018. 2018 she took $11,000 and 2019 she took $11,000.

The bank asked if she would like taxes taken OUT before the contribution was given to her.

I told her to say no since we would use the tax rate our income came to be for the year.

What tax rate or tax % would the bank take taxes out at? Is this a standard rate by the IRS (again this is NOT a contribution penalty- this is a death/inherited tradtional ira).

**seems pointless to have taxes taken out BY THE BANK (which reports it to the IRS on the 1099-R anyway)  when your going to pay taxes again on any amount at tax time as it goes into your income. Basically not getting the full amount of the distribution to use by giving taxes money back.

[MaryK4]

The taxes that the IRA takes out is included in Box 5 of the 1099-R you receive and entered on your tax return when you file.  It is usually at 20%.

[dmertz]

Default withholding on a traditional IRA distribution is 10%, not 20%, but the recipient can optionally request that nothing be withheld (as was done in this case) or that more than 10% be withheld for federal taxes.

Because the US tax system is a pay-as-you-go system, having taxes withheld can be helpful in avoiding a tax  underpayment penalty.

[fanfare]

Some people don't have any money at tax time. for those cases, the IRS uses withholding  to make sure they get their tax dollars.

In 2018 you'd be OK but in 2019 because your tax due in 2018 was up, you could get hit with underpayment penalty. 

[jmig703]

Lets clarify some things (again):

This is a DEATH benefit Inherited IRA from a death of a brother to my spouse (the sister).

My spouse decided to take the option Distributions over 5 years (before the tax change of Dec 2019 now is 10 years).

THe bank (Fifth Third) asked my spouse Do you want us to take taxes out? Spouse said no.

My questions are very specific:

1. What would have been the tax rate or percent that the bank fifth third BANK would have taken out? is this a standard rate across all FINANCIAL institutes?

THIS IS NOT A PENALTY (10%)

Our 1099 R shows box  2b checked - taxable amount not determined and box 4 0.00 OBVIOUSLY we will apply this income to our 1040 and will be adjusted per our tax bracket.

 I DONT SEE ANY ADVANTAGE of the bank taking out taxes since this is treated as income!! at the federal level

[jmig703]

your answers make no sense to the topic and questions of the mandatory distributions one needs to take on A DEATH IRA (inherited IRA).

[dmertz]

My answer specifically answered the question that you asked.  As I said, if no specific direction by the recipient is made, the law requires all IRA custodians to withhold 10% for federal taxes.  However, the the law also allows for recipient to specifically ask that either no taxes be withheld or that any amount over 10% be withheld.  (Financial institutions generally limit that choice to be whole percentage points between 11% and 99%.)  In other words, it's entirely up to the recipient whether 0%, 10% or some amount greater than 10% is withheld.  Tax withholding simply adds to the recipient's tax withholding from other sources and is credited on the recipient's tax return against the recipient's overall tax liability.

The actual tax liability resulting from an IRA distribution is not determined until the recipient's tax return is prepared.  The advantage of having of taxes withheld is that it will reduce or eliminate an underpayment penalty that would otherwise be due for having too little withheld or too little separately paid in estimated taxes (via Form 1040-ES) during each of the tax quarters throughout the year.