Overview
In January of 2022, the Internal Revenue Service (IRS) released new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, which was optional to use for traditional (including Simplified Employee Pension – SEP) and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) individual retirement account (IRA) distributions taken during 2022, and mandatory for IRA distributions taken in 2023 and later. It is without doubt that the changes to the federal income tax withholding process brought about by this new form have caused confusion for some IRA distribution recipients and for many IRA custodians and trustees. Furthermore, the IRS will update Form W-4R annually as it includes Marginal Rate Tables which are subject to annual adjustments.
Background
Prior to 2023, recipients of periodic and nonperiodic payments from pensions, profit-sharing, stock bonus, annuity, certain deferred compensation plans, IRAs, commercial annuities, and eligible rollover distributions used Form W-4P, Withholding Certificate for Pension or Annuity Payments, to make a federal income tax withholding election for such payments. A revised version of Form W-4P will continue to be used for taxable periodic pension and annuity payments. On the other hand, new Form W-4R will be used for taxable nonperiodic payments, of which most IRA distributions are categorized whether taken on demand or scheduled to be administered on an automatic payment basis, and eligible rollover distributions.
Withholding election
New IRS Form W-4R allows a recipient to have any percentage (i.e., zero to 100 percent) of a taxable IRA distribution withheld and remitted to the IRS. Prior to 2023, users of Form W-4P may recall that an election to withhold an amount between zero and 10 percent of a distribution was not an option. It is important to note that going forward a withholding election percentage must be made as a whole number, unless it is zero. Also, keep in mind that absent any previous withholding election the default withholding rate is 10 percent of an IRA distribution, unless the recipient makes an election for a different percentage. Nontaxable IRA amounts, including most Roth IRA distributions, are generally not subject to withholding and therefor an election is not necessary.
Wolters Kluwer forms’ users
Before 2023 and when an IRA distribution recipient’s federal income tax withholding election was made using IRS Form W-4P, Wolters Kluwer provided a substitute version of the form on its traditional and SIMPLE IRA distribution-related forms as it was simplistic and seldom updated by the IRS. As Form W-4R is significantly denser with content, includes the Marginal Rate Tables, and will be updated annually, it is not included on any of the Wolters Kluwer distribution-related forms. Wolters Kluwer has available to it forms’ users IRS Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions (Form IRA-W-4R-LAZ), making it as convenient as possible for an IRA custodian or trustee when administering IRA distributions. It is important to remember, however, that when the updated version is made available annually by the IRS an IRA custodian or trustee must use the updated version. Following is the first page of the IRS’s 2023 version of IRS Form W-4R:
