February 2022

IRS Creates New IRA Withholding Form

The IRS released the first week of January a new tax withholding form. It is Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions. This form is set forth on page 6. CWF modifies the IRS form and incorporates it into our IRA distribution forms. Use of the new form is optional for 2022 but mandatory for 2023. We recommend you use an updated form immediately because the IRS would like you to do so.

A payer such as an IRA custodian/trustee must comply with two tax withholding requirements. It must furnish a “notice” form explaining the tax laws applying when a person withdraws IRA or pension funds and then an “election/instruction” form.

The primary reason the IRS exists is - collect the tax revenues needed to operate the federal government. One of the main tools for collecting revenue is - there are laws mandating that federal income taxes be withheld at the time a person or a business realizes income whether that income be wage income or income on account of withdrawing money from a pension plan or an IRA. Wage withholding is mandatory and there are prescribed withholding tables. Withholding is mandatory at the rate of 20% when someone withdraws funds from a 401(k) plan when they are eligible to directly rollover the distribution but they elect not to do the direct rollover. Withholding is mandatory at the rate of 10% when someone withdraws funds from an IRA unless the individual elects to have no withholding or to have more withheld.

The IRS has recently created a new form (Form W-4R) to handle the withholding topic for nonperiodic distributions. The IRS purpose - the new form explains to a person that they can and should elect to have more than 10% or 20% withheld when they are subject to a higher tax rate such as 22% 25% 27%, etc.

Prior to 2022 the IRS had created Form W-4P to handle the withholding duties for distributions from pension plans and IRAs. Periodic distributions from a pension plan have been and still are treated as wages when determining how much was to be withheld for federal income tax purposes. Nonperiodic distributions which are ineligible to be directly rolled over from a pension plan were and are subject to the withholding rule which applied to IRA distributions. 10% was and is to be withheld but the person does have the right to instruct to have no withholding. All IRA distributions including periodic and nonperiodic distributions are treated as nonperiodic as long as the IRA is payable upon demand.