Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

includible in gross income.” Despite that clear statement, the IRS’s instructions to employers in Publication 15-A (2016), at page 24, after stating that eligible rollover distributions are subject to mandatory 20 percent withholding, states that “However, you should not withhold federal income tax if the entire distribution is transferred ...in a direct rollover to a traditional IRA , qualified pension plan [etc.],” making it sound as though mandatory withholding does apply to direct Roth rollovers. A retirement plan is not required to withhold taxes from an eligible rollover distribution to the extent it is “reasonable to believe” that the distribution is not includible in the payee’s income. § 3405(e)(1)(B)(ii) ; Reg. § 35.3405-1T , A-2. For example, a qualified distribution from a DRAC or Roth IRA, as a nontaxable distribution, would not be subject to withholding. If the entire distribution consists of securities of the employer corporation (as defined in § 402(e)(4)(E) ) (and up to $200 cash “in lieu of fractional shares”), there is no withholding. If the distribution consists of securities of the employer corporation plus cash and other property, the maximum amount the employer is required to withhold is the value of the cash and other property. § 3405(e)(8) . In connection with determining the amount required to be withheld from such a mixed distribution, “it is reasonable to believe that all net unrealized appreciation [NUA] from employer securities is not includible in gross income.” Reg. § 35.3405-1T , A-30; see ¶ 2.5 regarding NUA. See ¶ 2.1.07 (C) regarding withholding with respect to a plan loan offset distribution. If the plan administrator does not want to withhold from a plan or IRA distribution any income taxes beyond the amount required by § 3405 , the participant or beneficiary cannot force him to do so. Temp. Reg. § 35.3405-1T , A-6. However, if the plan administrator or IRA provider is agreeable, the parties can apparently agree to mutually voluntary withholding under § 3402(p)(3)(B) for such payments. See Form W-4P (2017), line 3. Mutually voluntary withholding Withheld income taxes are applied as a credit against the taxpayer’s income tax liability for the year of the distribution. § 31(a)(1) . Although § 31 is titled “Tax Withheld on Wages,” it applies to any amount “withheld as tax under chapter 24,” which includes withholding from retirement plan distributions, since § 3405 is part of chapter 24. § 6654 (part of Subtitle F of the Code) imposes a penalty for underpayment of estimated income taxes, and also establishes how withheld income tax relates to the taxpayer’s obligation to pay estimated taxes. For purposes of determining the penalty, the § 31 credit for withheld income taxes “shall be deemed a payment of estimated tax, and an equal part of such amount shall be deemed paid on each due date for such taxable year, unless the taxpayer establishes the dates on which all amounts were actually withheld ....” § 6654(g)(1) . This rule can help a participant or beneficiary who has underpaid his estimated taxes “catch up” (and possibly avoid the penalty for underpayment of estimated taxes) through a late-in-the-year distribution for which he elects income tax withholding. 2.4 Lump Sum Distributions Exceptions and special rules How withheld income taxes are applied