Don’t Hold Back on Meeting All Your IRA Withholding Requirements

Income tax withholding is a major area of compliance for financial organizations that serve as IRA trustees and custodians. Neglecting any of the requirements can be costly. Unfortunately, there is much confusion about the requirements. Here are answers to some common questions.

What are our responsibilities for federal income tax withholding on IRA distributions?

As an IRA trustee or custodian, you are required to do three things.

Offer IRA owners (or IRA beneficiaries) the opportunity to make a federal income tax withholding election on IRA distributions that may be subject to income tax. This means that your organization must provide a withholding notice to IRA distribution recipients so that they may make an election.
Withhold according to the distribution recipient’s instruction and deposit the withheld amounts to a federal depository.
Report withheld amounts to the IRS.

What is the required withholding notice and how do we provide it?

IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a substitute Form W-4P may be used to meet the withholding notice and election requirement. The substitute form must follow certain required guidelines or be submitted to the IRS for approval.

NOTE: All of Ascensus’ IRA distribution forms contain a federal withholding section that uses IRS Form W-4P language. Ascensus also offers a separate withholding notice and election form with IRS Form W-4P language.

Your organization must provide (in a paper or electronic format) a Form W-4P or equivalent notice to the distribution recipient

before every distribution, but not more than six months before the distribution if IRA distributions are scheduled less frequently than quarterly, or
once per year at a reasonable time before the first payment each year if distributions are scheduled quarterly or more frequently.

Keep in mind, by not providing the notice, your organization could be penalized $10 per failure.

How do we satisfy the withholding election?

The withholding election is met by having the recipient complete Form W-4P or substitute form. The recipient’s withholding election is valid until revoked and should be kept on file.

What are the federal withholding election options?

The distribution recipient may elect to either

withhold 10 percent or more (less than 10 percent not permitted), or
waive withholding altogether.

What if our client doesn’t make a withholding election?

Your organization should apply withholding based on the recipient’s last election on file. Without an election on file, your organization must withhold at a rate of 10 percent. If your organization fails to withhold (or does not obtain the client’s signed election waiving withholding), it may have to remit to the IRS the amount that should have been withheld.

Are there state IRA withholding requirements?

If your organization has an office in a state that requires withholding, or the IRA owner is a resident or required to file an income tax return in that state, state withholding rules generally apply. Check with the state’s department of revenue.