Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

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 (2010), p. 3. 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) . This exception does not apply to eligible rollover distributions; see “C.” 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; rather, they are requiring the IRA owner to elect out of withholding if the transfer is to a Roth IRA ( i.e., it is a taxable transfer). 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, 2008-12 IRB 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, the withholding rules apply to distributions to the surviving spouse in the same manner as to the participant. § 402(f)(2)(A) . QRP distributions to a nonspouse Designated Beneficiary are eligible rollover distributions (and therefore subject to mandatory withholding) if the beneficiary does not choose a direct rollover; see ¶ 4.2.04 . However, distributions to a beneficiary that is not a “Designated Beneficiary” cannot be rolled over and therefore are not subject to mandatory withholding. IRA distributions are not subject to the mandatory 20 percent withholding rule; an IRA distribution cannot be an “eligible rollover distribution” for withholding tax purposes even if it is eligible to be rolled over. The distinction between periodic payments and nonperiodic distributions is a little vague, but is not terribly important. Both types are subject to withholding by all types of plans, and with both types the recipient can elect out of having anything withheld (unless the distribution is an eligible rollover distribution). The only difference is the rate of withholding that applies if the recipient does not opt out of withholding. The significant distinction is between “eligible rollover distributions” and other payments, because withholding from an eligible rollover distribution is mandatory unless the distribution is sent by direct rollover to another retirement plan.