Thoughts on avoiding the 20% withholding rule on tax deferred IRAs

bee

I have not yet starting withdrawing from my tax deferred retirement accounts, but I wanted to post a question with regard to the 20% withholding rule. First how does it work? It appears somewhat automatic. If you need $4k in after taxed dollars for income needs you must take distributions closer to $5K (where $1K is withheld by the brokerage house for tax purposes).

Are there ways to avoid this automatic withholding provision?

I wonder if doing Roth conversions would be one way to avoid the brokerage in-house withholding provision.

Here's my thinking:

If I am going to to take a withdrawal from a tax deferred account why not take it as a Roth conversion in the exact amount needed and avoid unnecessarily withdrawing more tax deferred dollars? Financial advisors have taught us that paying taxes with tax deferred dollars is ill advised then they do exactly this in tax deferred accounts. In any given year, your income tax rate may be far below the required 20% withheld forcing these dollars into taxable accounts for good.

msf

The 20% rule is for deferred compensation plans, not for IRAs. You do sort of have the right idea that the way to avoid the mandatory withholding on employer plans is to do a direct transfer.

No withholding (unless you want it) on any IRA distributions.

Edit: One reason why one might want withholding is that it's treated as though it were paid to the IRS evenly throughout the year (like payroll withholding). So if you forgot to make estimated payments early in the year, this is one way to fudge it.

InformalEconomist

I have been in the (unfortunate) position of having to withdraw small amounts from tax-deferred IRA held directly with the mutual fund company. It's pretty simple: just tell them you don't want any amount withheld.
Sometimes there is a button online; otherwise I wrote them a letter: "Please do not withhold any amount for tax purposes."

I don't know how it works with the brokerage accounts. Maybe just ask them?