IRA Withholding Notice and Election Requirements

Originally published in The Federal Credit Union Magazine.

Guest blog post by Jennifer Basset, writer/editor at Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

With many of your members getting ready to take out their 2013 required minimum distributions (RMDs), now is the perfect time to brush up on the Individual Retirement Account (IRA) withholding notice and election requirements for credit unions.

Withholding is an important compliance issue for IRAs. Like withholding from a paycheck, IRA distribution withholding prepays income taxes. Taxes withheld from IRA distributions are credited against an individual’s total tax liability for the year. So not only is withholding required by law, it’s a valuable customer service that you provide your members.

Notice Requirement

For annual IRA distributions of $200 or more, your credit union must provide a withholding notice. This notice allows the member (i.e., the IRA owner or beneficiary) to choose exactly how much or what percentage they want withheld— including not having any withholding at all. Even if members choose not to withhold taxes from their distributions, they are still responsible for paying taxes on the distribution. The notice also lets them know they have the right to change their mind about how much they want withheld. If your credit union fails to give members a withholding notice, the IRS could assess a $10 penalty for each failure.

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