The default rate might be costing you more than it should. Here's how to set the right withholding — and what most retirees miss.
If you've recently turned 73 (will change to 75 in 2033), you've likely started thinking about Required Minimum Distributions, or RMDs, from your traditional IRA, 401(k), or other pre-tax retirement account. One of the most common questions we hear from clients at this stage is simple but important: are taxes taken out of your RMD?
The short answer is generally yes — but how much is taken out, when, and by whom is largely up to you. Understanding how RMD withholding works, and how it interacts with the rest of your retirement income, can help you avoid an unpleasant tax bill (or an unnecessarily large refund) next April.
An RMD is the minimum amount the IRS requires you to withdraw each year from most tax-deferred retirement accounts once you reach a certain age. Because these accounts were funded with pre-tax dollars, the IRS eventually wants its share — and RMDs are how that happens. Miss one, or take out less than required, and you could face a penalty, so getting the withdrawal (and the withholding) right matters.
By default, generally yes — but it's your choice, not a fixed rule. When you take a distribution from a traditional IRA or an employer-sponsored plan, the custodian will generally withhold federal income tax automatically unless you tell them otherwise. For IRA distributions, the default federal withholding rate is 10%. You can change that rate to whatever percentage makes sense for your situation, or elect not to have any tax withheld at all.
In other words, withholding on your RMD isn't something that happens to you — it's a setting you control. The default exists so that something is withheld if you don't make an election, not because you're required to have taxes taken out.
Withholding isn't an extra tax — it's simply a prepayment toward the tax you'll ultimately owe on that income when you file your return. The real question isn't just whether taxes are withheld, but whether the right amount is withheld.
Your RMD is taxed as ordinary income at the federal level, added to whatever other income you receive during the year — Social Security, pension payments, part-time work, dividends, and so on. The custodian holding your IRA or 401(k) doesn't know your full financial picture. It only knows what you tell it. That's why the default 10% withholding often isn't enough for retirees who are already in a higher bracket once all their income sources are combined, and it's sometimes more than necessary for retirees with lower total income.
State taxation of RMDs varies widely, and it's easy to overlook. A handful of states have no state income tax at all, so residents there won't owe state tax on an RMD regardless of amount. Other states tax retirement account distributions the same as any other ordinary income, with no special exemption. Some states offer partial or age-based exemptions for retirement income, including RMDs, up to a certain dollar threshold. State withholding rules also differ: some states require withholding whenever federal tax is withheld, others allow you to opt out, and some don't withhold at all regardless of your election.
This is the piece that trips people up most often. Your RMD doesn't exist in a vacuum for tax purposes — it stacks on top of all your other ordinary income for the year. If you're already receiving Social Security, a pension, or drawing income from other sources, your RMD is added on top of that income when your tax bracket is calculated. That means the withholding rate that made sense for your pension or Social Security payment may not be the right rate for your RMD, because the RMD is effectively taxed at your marginal rate — the rate on your last dollar of income.
There isn't one "correct" way to handle RMD withholding, and different strategies suit different situations. A few approaches we commonly discuss with clients:
Because your RMD amount changes each year based on your account balance and life expectancy factor, it's worth revisiting your withholding election annually rather than setting it once and forgetting about it.
Are taxes taken out of your RMD? Yes, by default, and you have meaningful control over how much. The bigger question is whether your withholding strategy reflects your full financial picture — your other income, your state's rules, and the bracket your RMD actually lands in once it's stacked on everything else. That's a planning conversation, not a one-size-fits-all answer.
At Oak Road Wealth Management, we're a fee-only fiduciary firm based in Lee's Summit, Missouri, and we work with retirees across the country to coordinate withdrawal strategies, withholding elections, and overall retirement income planning. If you'd like help thinking through how your RMD fits into your broader tax picture, we'd welcome the conversation.
Generally yes, by default. Custodians generally withhold federal income tax at 10% unless you submit a withholding election form specifying a different amount, or electing not to have any tax withheld at all.
In most cases, yes. You can elect zero withholding on an IRA distribution by submitting the appropriate form to your custodian. Keep in mind you're still responsible for the tax owed, so you'll want a plan to cover it, whether through estimated payments or withholding elsewhere.
It's added to your other income. Your RMD stacks on top of Social Security, pension payments, and any other income you receive during the year, and is taxed at your marginal rate, not a separate flat rate.
No. State treatment of RMD withholding varies widely. Some states have no income tax and no withholding requirement, some require withholding whenever federal tax is withheld, and others leave the choice entirely up to you. It's worth confirming the rules in your specific state.
One common approach is to estimate the marginal tax bracket your RMD will fall into once it's combined with your other income for the year, and set your withholding to that rate. This isn't the only strategy, and the right approach depends on your full financial picture, so it's worth reviewing with your advisor and accountant.
This article is for informational purposes only and is not intended as tax advice. Oak Road Wealth Management does not provide tax advice. Tax rules are complex and vary based on individual circumstances and state of residence, and they change over time. Please consult your accountant or a qualified tax professional before making decisions about RMD withholding or any other tax matter.
Written by Andrew Matz, Financial Planner at Oak Road Wealth Management.
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