Generally, pension and annuity payments are subject to Federal income tax withholding. The withholding rules apply to the taxable part
of payments from an employer pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan. The rules also apply to
payments from an individual retirement arrangement (IRA), an annuity, endowment, or life insurance contract issued by a life insurance company. There
is no withholding on any part of a distribution that is not expected to be includible in the recipient's gross income.
Generally, recipients of payments described above can choose not to have withholding apply to their pensions or annuities (however, see
Mandatory Withholding below). The election remains in effect until the recipient revokes it. The payer must notify the recipient that this
election is available.
Generally, periodic payments are pension or annuity payments made for more than 1 year that are not eligible rollover distributions (see discussion
below). Periodic payments include substantially equal payments made at least once a year over the life of the employee and/or beneficiaries or for 10
years or more. For withholding purposes, these payments are treated as if they are wages. You can figure withholding by using the recipient's
Form W-4P, Withholding Certificate for Pension or Annuity Payments, and the income tax withholding tables and methods in Circular E or the
alternative tables and methods in this publication.
Recipients of periodic payments can give you a Form W-4P to specify the number of withholding allowances and any additional amount they want
withheld. They may also claim exemption from withholding on Form W-4P or revoke a previously claimed exemption. If they do not submit a Form W-4P, you
must figure withholding by treating a recipient as married with three withholding allowances. See Form W-4P for more information.
Withhold 10% of the taxable part of a nonperiodic payment that is not an eligible rollover distribution. The recipient may request additional
withholding on Form W-4P or claim exemption from withholding.
Payments delivered outside the United States.
The election to be exempt from income tax withholding does not apply to any periodic or nonperiodic payment delivered outside the United States or
its possessions to a U.S. citizen or resident alien. See Form W-4P for more information.
A nonresident alien can elect exemption from withholding only if he or she certifies to the payer that he or she is not (1) a U.S. citizen or
resident alien or (2) an individual to whom Internal Revenue Code section 877 applies (concerning expatriation to avoid tax). The certification must
be made in a statement to the payer under penalties of perjury. However, nonresident aliens who choose such exemption will be subject to withholding
under Code section 1441. See Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and the Instructions for Form
Eligible rollover distributions.
Withhold 20% of an eligible rollover distribution unless the recipient elected to have the distribution paid in a direct rollover to an eligible
retirement plan, including an IRA. An eligible rollover distribution is the taxable part of any distribution from a qualified plan, governmental
section 457 plan (for distributions after December 31, 2001), or tax-sheltered annuity (but not an IRA) except:
- One of a series of substantially equal periodic payments (at least annually) made for the life or life expectancy of the employee and the
employee's beneficiary or for a specified period of 10 years or more.
- Any part of a distribution that is a minimum distribution required by Code section 401(a)(9).
- A hardship distribution. A distribution will qualify for hardship if it is (a) made on account of immediate and heavy need and (b) necessary
to satisfy the need. This includes medical and educational expenses and costs for purchasing a new residence, or to prevent eviction or foreclosure on
a current residence.
- Other exceptions apply. For details see the Instructions for Forms 1099-R and 5498.
You are not required to withhold 20% of an eligible rollover distribution that, when added to other rollover distributions made to one person
during the year, is less than $200.
A recipient of an eligible rollover distribution cannot claim exemption from the 20% withholding. However, a recipient may elect to have more than
20% withheld using Form W-4P. Do not provide the recipient a Form W-4P for eligible rollover distributions unless he or she wishes to request
additional withholding in excess of the mandatory 20%.
Notice to recipient (section 402(f) notice).
Generally, you must provide a written explanation to the recipient at least 30 but no more than 90 days before making an eligible rollover
distribution. You must explain the rollover rules, special tax treatment for lump-sum distributions, direct rollover option, and the mandatory 20%
withholding rule. Notice 2000-11 (2006 IRB 572), contains a model notice you can use to satisfy this requirement. You can find Notice 2000-11 on page
572 of Internal Revenue Bulletin 2000-6 at www.irs.gov.
Similar rules apply to distributions from tax-sheltered annuities. The IRS has issued regulations on these requirements under sections 401(a)(31),
402, 403(b), and 3405.
Depositing and Reporting Withholding
Report income tax withholding from pensions and annuities on Form 945, Annual Return of Withheld Federal Income Tax. Do not report these
liabilities on Form 941. You must furnish the recipients and the IRS with Form 1099-R, Distributions From Pensions, Annuities, Retirement
or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Deposit withholding from pensions and annuities combined with any other nonpayroll withholding reported on Form 945 (e.g., backup withholding). Do
not combine the Form 945 deposits with deposits for payroll taxes. Circular E and the separate Instructions for Form 945 include
information on the deposit rules.