Life and Death Planning for Retirement Benefits

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124 Life and Death Planning for Retirement Benefits
regarding NUA. See 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 the participant or beneficiary cannot force
him to do so. Temp. Reg. A-6. However, if the plan administrator or IRA provider
is agreeable, the parties can apparently agree to mutually voluntary withholding under
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. Although 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 and are part of chapter 24.
(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, th 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 ....” 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 i after 1999, it went
back to its pre-1992 home, 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