- The type of retirement plan, such as a pension, annuity, IRA, or 401(k)
- The frequency of the distributions
Learn more about how withholding rules for retirement plans work.
Types of Retirement Plan Distributions
There are a few different types of distributions from retirement plans.
Normal distributions are when funds are taken from a retirement plan after you have reached retirement age.
Required Minimum Distributions
Distributions that must be taken from tax-deferred retirement plans, such as a traditional IRA (individual retirement account), 401(k), or 403(b), once you reach age 72, are known as required minimum distributions (RMDs).
Periodic distributions are pension or annuity payments that are paid regularly (weekly, monthly, or yearly) to the employee and/or beneficiaries for more than one year.
One-time, lump-sum payments from an employee retirement plan are known as nonperiodic distributions. Nonperiodic distributions do not include IRA rollovers or transfers, systematic withdrawals, or required minimum distributions (RMDs).
You may take distributions from your retirement accounts before you reach retirement age. However, you will have to pay a tax penalty if you make these withdrawals early.
This is intended to discourage employees from using their retirement savings before they are actually retired.
Tax Withholding on Periodic Distributions
Periodic distributions are subject to withholding using the same methods as wage income. You will need to fill out form W-4P to inform the retirement plan's administrator of your withholding allowances. This applies to payments you receive from:
- A pension, annuity, profit-sharing, or stock bonus plan from an employer
- A traditional IRA
- Any other deferred compensation plan
- A commercial annuity purchased from an insurance company
You can also choose not to have any federal tax withheld on periodic distributions by writing "No Withholding” on in the space below Step 4(c) on Form W-4P. You'd then only have to fill out section 1 and 5. If you choose not to have any tax withheld, you may have to make estimated tax payments.
If you don't fill out Form W-4P, tax will be withheld as if you were married and claiming three withholding allowances.
Tax Withholding on Nonperiodic Distributions
You do not need to show hardship to take a distribution from your IRA or annuity before age 59 1/2. When you do, these nonperiodic distributions will be considered part of your taxable income.
These distributions are subject to withholding for federal income tax at a flat rate of 10%. You can also ask to have an additional amount withheld on your Form W-4R.
If you receive a rollover-eligible distribution that is not a rollover, tax will be withheld at a rate of 20%. However, there will be no tax withheld if it is directly rolled over into an IRA or other qualified retirement plan.
If you take a distribution from a SIMPLE-IRA in the first two years of participating in the plan, it will be subject to a 25% additional tax.
Nonperiodic Distributions From an Employer's Retirement Plan
Nonperiodic distributions from an employer's retirement plan, such as 401(k) or 403(b) plans, are subject to withholding for federal income tax at a flat rate of 20%. Nonperiodic distributions from an employer's plan include lump-sum distributions, even if those distributions may later be rolled over to another plan.
However, if the distribution is rolled over directly to another retirement plan in a trustee-to-trustee transfer, tax is not required to be withheld.
If you receive the distribution before you turn 59 1/2, it may be subject to an additional 10% tax penalty for early distributions.
Withholding on Social Security Benefits
You may choose to have federal income tax withheld from your Social Security benefits. Federal income tax can be withheld at a rate of 7%, 10%, 12%, or 22%. Use Form W-4V to let the Social Security Administration know how much tax you would like to have withheld.
Withholding on Roth IRA Distributions
Because you have already paid tax on contributions to a Roth IRA, qualified distributions are made tax-free. Qualified distributions are made:
- When or after you turn 59 1/2
- Because you are disabled
- To your beneficiary after your death
If you make a non-qualified distribution (for example, before you turn 59 1/2), it will be subject to a 10% tax penalty. If this amount is not withheld by your plan administrator, you will have to pay it in estimated taxes.
How Withholding Impacts Your Taxes
Withholding on your retirement plan distributions does not exempt you from filing your taxes.
Just like withholding on wages, withholdings on distributions are taxes taken out of your income throughout the year. You will still need to file your taxes by Tax Day every year (usually April 15). You'll need to report:
- All your forms of income, including your retirement plan distributions
- Taxes you have already paid
- Any credits or deductions you are entitled to take
If you have a high income and few deductions, you may end up owing more tax than what was withheld from your distributions throughout the year. If you have a lower income or more deductions, you may be entitled to a tax refund.
Frequently Asked Questions (FAQs)
What states have mandatory withholding for state taxes on IRA distributions?
Not all states require state taxes be withheld from IRA distributions. States that require income tax be withheld from IRA distributions include Arkansas, California, Connecticut, Delaware, Iowa, Kansas, Maine, Massachusetts, Michigan, North Carolina, Oklahoma, Oregon, and Vermont. Each state has its own minimums and exceptions so consult a tax or financial advisor if you're not sure how it works.
Are pension plan distributions subject to withholding?
Yes, pension plan distributions are generally subject to federal income tax withholding.