Distributions from an employersponsored retirement plan may or may not be subject to withholding. In some cases, withholding is mandatory and in others, the recipient can elect out.
Eligible Rollover Distributions. In general, the payor of any designated distribution that is an eligible rollover distribution must withhold an amount equal to 20% of the distribution. The recipient may not elect out of the withholding requirement.
- Exception: Eligible rollover distributions are not subject to withholding if expected dstiributions are less than $200 for the year. Also, 20% withholding generally only applies to any previously untaxed amount. The most important exception by far is that no withholding is required if the plan directly rolls over (in a trusteeto trusteetransfer) the eligible rollover distribution amount to another qualified retirement plan or IRA.
Periodic Payments. The payor of a periodic payment (one made at regular intervals for more than one year) that isn’t an eligible rollover distribution must withhold from the payment as if it were a wage payment for the appropriate payroll period.
- Exception: Generally, the plan administrator must withhold at the rate for a married individual with 3 withholding exemptions. However, recipients have the right to elect no withholding or elect to have a different amount withheld and revoke the election at any time.
Nonperiodic Payments. A nonperiodic payment is a distribution that usually isn’t made at regular intervals and isn’t an eligible rollover distribution. Nonperiodic payments generally are subject to 10% withholding.
- Exception: The recipient may elect no withholding or have a different amount withheld by filing a Form W4P with the plan administrator.
Reminder: Distributions from designated Roth accounts in 401(k), 403(b), or 457(b) plans have no withholding requirement because the distribution is not taxable. If a nonqualified distribution is made from such an account, withholding is required only from any distributed earnings that the recipient must include in gross income.