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.
Withholding
Periodic Payments
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.
Nonperiodic Payments
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.
Mandatory 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.
Nonresident aliens can elect exemption from withholding only if
they certify to the payer that they are 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
Corporations, and the Instructions for Form 1042-S.
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 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. See the Form 1099-R instructions in
the 2001 General Instructions for Forms 1099, 1098, 5498, and
W-2G.
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 92-48, 1992-2 C.B. 377,
contains a model notice you can use to satisfy this requirement.
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.
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