Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

regarding NUA. See ¶ 2.1.07 (B) regarding withholding with respect to a plan loan offset distribution. 2.3.04 Mutually voluntary withholding 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 IRS Publication 575, “Pension and Annuity Income” (2009), p. 9, and Form W-4P (2010), line 3. 2.3.05 How withheld income taxes are applied 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 § 3402 and § 3405 are 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 Through the years, the Code has provided a special gentle treatment for “lump sum distributions” (LSDs) from qualified retirement plans (QRPs). A person who wishes to obtain this special treatment is confronted with some of the most convoluted requirements known to post- ERISA man. 2.4.01 Introduction to lump sum distributions Congress changed the rules on LSD treatment so often that the IRS was unable to keep pace with regulations. There are only assorted proposed and temporary regulations issued in 1975– 1979 (under old Code § 402(c)), that became obsolete before they could be finalized. The instructions for IRS Forms 4972 and 1099-R are often the best indication of the IRS’s interpretation of the LSD rules. From 1992 through 1999, the definition of LSD was found in § 402(d) ; after 1999, it went back to its pre-1992 home, § 402(e) . One special LSD deal, five-year forward averaging, ceased to be available for distributions after 1999. To achieve the favorable tax treatments still available for LSDs, the taxpayer must clear various “hurdles,” many of which are surrounded by hidden-issue “land mines.” The requirements that must be met in order for a distribution to qualify as an LSD are summarized at ¶ 2.4.02 – ¶