Avoid Costly Mistakes: What You Need to Know about IRA Withholding Notice Requirements
In the financial services industry, compliance is key, and when it comes to IRAs, withholding notice requirements are one area you don’t want to overlook. If a financial organization is found to be noncompliant by the IRS for not following federal tax withholding requirements on IRA distributions, it can result in hefty penalties.
So what’s involved in the IRA withholding process, and how can you ensure you’re covering all your bases?
The Basics: What’s Required?
Financial organizations must notify IRA owners that they have the option to withhold federal taxes from their distributions. Usually, this is done using IRS Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions or a substitute form. Financial organizations have been required to use Form W-4R, or an acceptable substitute form to capture withholding elections for nonperiodic distributions (i.e., on-demand distributions) and eligible rollover distributions since 2023. With this form, IRA owners can elect to withhold less than 10 percent. Previously, IRA owners could waive withholding, or withhold 10-100 percent of the distribution amount.
With the introduction of Form W-4R, the IRS also issued a revised Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, which is now used to capture withholding elections for periodic distributions (i.e., annuity or similar periodic payments).
The goal? To remind clients of their withholding options in case they wish to make any changes. Life situations can change—maybe a client didn’t want to withhold last year, but now he does. It’s all about giving clients the flexibility and knowledge to make those decisions.
This notification must take place at different times during the year, depending on when IRA owners take their distributions. If they take no action after receiving this notice, their current withholding election will remain in effect. If they do not have a withholding election on file, then the financial organization must apply the default withholding rate (i.e., 10 percent for nonperiodic distributions.)
If an IRA owner takes distributions quarterly or more frequently, the financial organization must provide a withholding notice only once per year at a reasonable time before the first distribution each year.
IRA owners who take IRA distributions less frequently than quarterly must receive a withholding notice no more than six months before each distribution. Financial organizations often satisfy this requirement by sending semi-annual notices to clients, usually in January and in June. By mailing these notices twice a year, organizations ensure that no matter when their clients take distributions, they are likely covered.
Financial organizations can receive a $100 penalty per failure, up to a maximum of $50,000, for not timely providing withholding notices to clients.
Short-Staffed or Overwhelmed? Let Us Help!
If you are unsure whether your IRA department will be able to meet your withholding notice obligations, Ascensus is here to help. Ascensus will mail an IRA Withholding Notice and Election form twice a year to your IRA owners and beneficiaries who are receiving scheduled annual distributions. Our streamlined process reduces your risk of noncompliance.
Ascensus is now accepting subscribers for the June 2025 mailing. Let us take this IRA reporting responsibility off your hands. We know how to navigate all IRA withholding rule changes, including form updates.
Contact customersupport@ascensus.com to learn more about our 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.
