Distributions you receive from a retirement plan are subject to federal income tax withholding.  You can choose not to have income tax withheld, but if you do, you may have to make estimated income tax payments, depending on your overall federal income tax liability.  This will be determined by factors including your filing status, number of personal and dependent exemptions, the amount of the retirement payments you are receiving and any other taxable income you have.

Which Plans Are Subject to Withholding Tax

The withholding tax rules apply to the following types of retirement plans:

• A pension, profit-sharing, stock bonus, or annuity plan maintained by your employer,
• Any other deferred compensation plan,
• A traditional individual retirement arrangement (IRA), or
• A commercial annuity contract you purchase yourself, including an annuity, endowment, or life insurance contract.

The withholding tax applies to the taxable part of the distributions, and not to any nontaxable part, such as the portion that represents a return of your cost or investment in the plan or contract.

Choosing Not to Have Federal Income Tax Withheld

You can choose not to have income tax withheld from the distributions you receive, whether they are periodic or non-periodic, by using Form W-4P, Withholding Certificate for Pension or Annuity Payments.  There is a line on the form with a box to check if you do not want any federal income tax withheld from your pension or annuity.  But you cannot choose not to have federal income withheld from eligible rollover distributions.  Your choice will remain in effect until you revoke it.

Social Security Number and U.S. Home Address

When you complete Form W-4P you will need to be sure to include your taxpayer identification number (social security number).  Without it, the payer of your distributions will be obligated to withhold tax.  Also, if you are a U.S. citizen or resident, you will have to give a home address that is in the United States or its possessions.  If you give the address of a nominee, trustee, or agent who receives the payments on your behalf, but you do not indicate a home address in the U.S. or its possessions, the payer will also be obligated to withhold taxes.

Non-Resident Aliens

If you are not a U.S. citizen or resident and you do not have a U.S. home address, and you choose not to have income tax withheld, you must certify to the payer that you are not a U.S. citizen or resident and did not leave the country to avoid taxes.  But in this case, you may be subject to the flat 30% tax that applies to nonresident aliens.

Amount Withheld

Unless you choose not to have income tax withheld, the periodic retirement payments you receive will be treated like wages for withholding tax purposes.  You should complete Form W-4P, indicating your filing status and exemptions in order to have the proper amount withheld. 

If you do not file a Form W-4P, tax will be withheld as if you were married claiming three allowances. (This may not be the right amount of withholding for you).  And, if you do not provide your taxpayer identification number (social security number), or the number you provide is incorrect, tax will be withheld as if you were single with no allowances (withholding at a higher rate).  If you have filed a Form W-4P, and later there are changes in your tax situation (change in filing status or number of allowances, for instance), you will need to file a new Form W-4P.

Non-periodic Distributions

Tax will be withheld from periodic payments (regular installments) at the rates determined by the information you provide on Form W-4P.  But withholding on non-periodic payments, that are not eligible rollover distributions, will be at 10%.  You can ask the payer to withhold more that 10%, if you choose, by indicating the additional amount you want withheld on line 3 of the second part of Form W-4P.

Eligible Rollover Distributions

Generally, the withholding tax on eligible rollover distributions is 20%, and you cannot choose not to have tax withheld.  But if you ask the administrator of the plan to make a direct rollover into another qualified retirement plan or IRA, you can avoid the withholding tax.  If you receive a rollover distribution and you want to roll this distribution over into another retirement account, you will need to remember to contribute the 20% that was withheld in order to complete the amount of the rollover, and avoid the 10% additional tax on early withdrawals.

Estimated Tax

In determining whether your withholding will be sufficient, or whether you will need to make estimated tax payments, your estimated tax for the year is your total expected income tax, self-employment tax, and any other taxes for which you may be liable, minus any tax credits you can take and minus the tax that has been withheld.

Generally, you must make estimated tax payments if you expect that you will owe $1,000 or more when you file your return, and you expect that the tax withheld will be less than the smaller of:

• 90% of the tax you expect to report on your return for this year, or
• 100% of the tax you reported on last year’s return.

If your adjusted gross income is over a certain amount, you may have to use 110% instead of 100% of the tax you reported last year.

You should keep in mind, when determining if you need to make estimated tax payments, that part of your social security or railroad retirement benefits may be taxable.