Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

special rules are discussed at ¶ 2.3.03 . ¶ 2.3.04 explains mutually voluntary withholding. Finally, ¶ 2.3.05 explains how withheld income taxes are applied to the recipient’s tax liability for the year.

Periodic, nonperiodic, and eligible rollover payments

§ 3405 governs withholding of income taxes from retirement plan and IRA distributions. Here are the Code’s opening bids regarding such withholding. Note that in some (but not all) cases the distributee can opt out of having income taxes withheld. If the recipient wants the plan to withhold more income tax than is required, see ¶ 2.3.04 . The withholding requirements distinguish between “periodic payments” ( § 3405(e)(2) ), “nonperiodic distributions” ( § 3405(e)(3) ), and “eligible rollover distributions” ( § 3405(c)(3) ). A. Periodic payments from all types of retirement plans, including IRAs, are subject to withholding of taxes at the same rate as wages. § 3405(a)(1) . The recipient can elect out of having anything withheld from a periodic payment, so the withholding is voluntary as far as the recipient is concerned. § 3405(a)(2) . The Code defines “periodic payment” as a distribution that is “an annuity or similar periodic payment.” § 3405(e)(2) . See Reg. § 35.3405-1T , A-9. B. Nonperiodic distributions other than “eligible rollover distributions” (see “C”) are subject to withholding at a flat rate of 10 percent. § 3405(b)(1) . This rule applies to all types of plans, including IRAs. § 3405(b)(1) , (e)(1)(A) , (3) . “Distributions from an IRA that are payable on demand are treated as nonperiodic payments.” Instructions for IRS Form W-4P (2016), p. 3. Unless the distribution is an eligible rollover distribution (in which case see “C”), the recipient can elect out of having anything withheld from a nonperiodic distribution, so again the withholding is voluntary from the participant’s perspective. § 3405(b)(2) . In the case of a direct transfer from an IRA to another IRA, the paying plan could choose to treat the participant’s request for a direct IRA-to-IRA transfer as an election not to have withholding apply. Reg. § 35.3405-1T , D-33. However, anecdotal evidence suggests that at least some IRA providers are not doing so in connection with Roth IRA conversions; rather, they are withholding 10 percent federal income tax unless the IRA owner elects out of withholding. C. Eligible rollover distributions from QRPs are subject to withholding at a 20 percent rate, and the recipient can not elect out of this withholding if the distribution is paid to him. The only way to make an eligible rollover distribution not subject to 20 percent withholding requirement is to have the distribution paid directly to an eligible retirement plan (direct rollover; ¶ 2.6.01 (C)), such as an IRA or even a Roth IRA. § 3405(c) ; Notice 2008-30, 2008-1 CB 638, A-6; PLR 2000-38055. An “eligible rollover distribution” is a defined term meaning basically any distribution from a qualified plan ( § 402(c)(4) ) or (after 2001) 403(b) plan that is eligible to be rolled over. § 3405(c)(3) ; § 402(f)(2)(A) ; see ¶ 2.6.02 . Because the surviving spouse as beneficiary has the same rollover options as the deceased participant would have had ( ¶ 3.2.02 ), the withholding rules apply to distributions to the surviving spouse in the same manner as to the participant. Similarly, QRP distributions to a nonspouse Designated Beneficiary are eligible rollover distributions (and therefore subject to mandatory