Plan Now to Meet Your IRA Withholding Notice Requirements in 2022
By Jodie Norquist, CIP, CHSP
EDITOR’S NOTE: On November 5, 2021, the day after this article was published, the IRS issued an updated draft of Form W-4R, in which the cover page states that the IRS will postpone until January 1, 2023, the requirement to begin using the new form.
As 2021 winds down, you may be as busy as ever, gearing up for the start of a new year. Financial organizations that serve as either an IRA trustee or custodian have many responsibilities to maintain compliance. One of those responsibilities includes satisfying IRS federal tax withholding requirements on IRA distributions.
Now is the time to start preparing to mail your IRA owners their withholding notices—before many of them begin taking IRA distributions in January.
Withholding remains a key area of IRA compliance, as the costs associated with failing to timely provide withholding notices to clients can be steep. What used to be a $10 penalty per failure was increased to $100 per failure, effective after December 31, 2019. This penalty, when applied to numerous accounts and perhaps multiple failures throughout the year, can easily increase to $50,000—the maximum penalty amount that the IRS will assess for such failures.
On top of these annual requirements, the IRS is adding a new withholding form. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, will be used to withhold federal income tax from nonperiodic payments and eligible rollover distributions, currently scheduled for use beginning in 2022. This new form—still in draft status as of this writing, thus adding a measure of uncertainty for its use in the coming year—may require additional withholding notice language once it is finalized.
So, how can your organization meet its withholding notice requirements and limit its risks?
Know the Rules
Federal withholding is the prepayment of anticipated income taxes owed on a distribution at the time the distribution is taken. The recipient’s actual tax obligation is determined at the time of tax return filing, based on such factors as marginal tax rate, etc. IRA owners must be notified of their right to waive withholding or to make an affirmative withholding election (an election other than the default rate of 10 percent) on their distributions. The timing of the notification is important. IRA owners who take quarterly or more frequent distributions must be notified before the first distribution each year. IRA owners who take distributions less frequently than quarterly must be notified no more than six months before a distribution, and early enough to allow them to make a withholding change.
A withholding notice and election appear on each of Ascensus’ IRA Withdrawal Authorization forms. To notify individuals who are receiving scheduled distributions of their withholding election rights, financial organizations may use the Ascensus form, IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments, or another substitute form.
Many financial organizations choose to mail withholding notices twice each year to their IRA owners, once in December and once in June. That way, no matter the frequency of payments—whether scheduled or unscheduled—the withholding notice obligation is met. Now would be the time to start preparing to mail withholding notices for IRA owners who schedule their annual distributions in the first six months of the year.
Ascensus continues to closely monitor the potential withholding rule changes for 2022. But no matter when they take effect, we can help you navigate these changes, which may include new withholding notice language and Ascensus form updates.
Limit Your Risks
If no one is overseeing these responsibilities at your organization, or if you’re unsure whether all of your withholding notice obligations are being met, Ascensus’ IRA Withholding Notice Mailing Service can help. Ascensus will mail an IRA Withholding Notice and Election form twice per year to your IRA owners and beneficiaries who are receiving scheduled annual payments. This is a simple, stress-free way to eliminate errors and the costly risk of noncompliance.
Ascensus is now taking final subscribers for the December 2021 mailing. Put your mind at ease with one less thing to worry about as your staff gears up for other IRA reporting obligations in January.
Contact customersupport@ascensus.com to learn more about this mailing service.
If your organization is a Fully-Administered Program client, call 800-356-9140, or select "IRA Withholding Notice Mailing" from the Maintenance Tools section on the IRAdirect® homepage to enroll.
