26.9 Withholding on Retirement Distributions

Retirement distributions are subject to withholding taxes, but you may choose to avoid withholdings. The method of avoiding withholding varies with the type of payment.

Periodic payments.

If you receive periodic payments in installments over more than one year, such as from a pension or an annuity, withholding is required unless you elect to avoid withholding on Form W-4P, or on a substitute form furnished by the payer. If you are a U.S. citizen or resident alien, withholding may not be avoided on pensions or other distributions paid outside the U.S. or U.S. possessions. Payment must be to your home address within the U.S. (or in a U.S. possession) to avoid withholding.

Unless you tell the payer otherwise, wage withholding tables are used to figure withholdings on periodic payments as if you were married and claiming three withholding exemptions. Withholding allowances may be claimed on Form W-4P for estimated itemized deductions, tax credits and adjustments to income such as alimony payments, student loan interest, and deductible IRA contributions.

You may also request that the payer withhold a specific amount of additional tax for each payment.

Planning Reminder

Direct Rollover From Employer Plan Avoids Withholding

Your employer must withhold 20% from a distribution paid to you if the distribution was eligible for tax-free rollover (7.8).Withholding does not apply if you have the employer make a direct rollover to a qualified plan or IRA.

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Nonperiodic payments from IRAs and commercial annuities.

Nonperiodic payments are subject to withholding at a flat 10% rate unless you elect to avoid withholding on Form W-4P (or substitute form). IRA distributions that are payable upon demand are considered nonperiodic and, thus, subject to the 10% withholding rule.

Nonperiodic payments from qualified employer plans.

Employers must withhold 20% from nonperiodic payments, such as lump-sum distributions that are eligible for tax-free rollover but which are paid directly to you. To avoid withholding you must direct your employer to make a direct rollover (7.8) of the funds to an IRA or to a qualified plan of your new employer. If you do not instruct your employer to make the direct transfer and elect to personally receive the distribution, 20% will be withheld before payment is made to you.

See Chapter 7 for a further explanation and an Example showing the effects of the withholding rule where you receive the distribution and then decide to make a rollover yourself (7.8).