Updates To Federal Withholding Requirements

The federal government has updated its tax withholding requirements, particularly regarding distributions from Qualified Retirement Plans (QRPs) and the voluntary withholding process.

Mandatory vs. voluntary tax withholding

• Mandatory withholding applies when no voluntary election is made or for distributions from a QRP eligible for rollover.
• Voluntary withholding allows clients to choose the amount or percentage of tax withheld, including opting out (withholding at zero). However, voluntary withholding is not available for rollover-eligible distributions.

Eligible distributions for rollover

Distributions eligible for rollover include withdrawals from QRPs, such as 401(k), 403(b) and similar retirement accounts. However, Required Minimum Distributions (RMDs) from QRPs cannot be rolled over, meaning voluntary tax withholding can be elected for RMDs.

Forms for voluntary withholding elections

Both forms are available on Agents.EquiTrust.com and the client portal.

• Form W-4R is used for nonperiodic payments (partial withdrawals, full surrenders, death claims, RMDs and certain rider payments).
• Form W-4P is used for periodic payments (SPIA payments, annuitizations, death payouts and systematic withdrawals).

Action required for missing forms

• If the appropriate form is not submitted, federal tax law mandates that mandatory withholding apply.
• If a form is incomplete or not in good order (NIGO), clients must either resubmit a correct form or proceed with mandatory withholding.

State withholding

• States that allow voluntary withholding will give clients the option to opt out of mandatory state withholding.
• Some states require specific forms to opt out or adjust the withholding rate.
• Clients should consult their tax advisor or state tax department for state-specific withholding forms.