Generally, pension and annuity payments are subject to Federal income tax withholding. The withholding rules apply to the taxable part of payments or distributions from an employer pension, annuity, profit-sharing, stock bonus, or other deferred compensation plan. The rules also apply to payments or distributions from an individual retirement arrangement (IRA) or an annuity, endowment, or life insurance contract issued by a life insurance company. There is no withholding on any part of a distribution or payment that is not reasonably believed to be includible in the payee’s gross income. For this purpose, any distribution or payment from or under an IRA (other than a Roth IRA) is treated as includible in gross income. Generally, payees of “periodic payments” and “nonperiodic payments” (defined below) can choose not to have withholding apply to their pensions or annuities (however, refer to Mandatory Withholding on Payments to be Delivered Outside the United States below). The election remains in effect until the payee revokes it. The payer must notify the payee that this election is available. Except where explicitly noted, the discussion below applies to payments to U.S. persons. Periodic payments Generally, periodic payments are made in installments at regular intervals over a period of more than 1 year (for example, monthly pension or annuity payments) that are not eligible rollover distributions. Periodic payments include substantially equal payments made at least once a year over the life of the employee and/or beneficiaries or for 10 years or more. For withholding purposes, these payments generally are treated as if they were wages, see Tax withholding types. A payer can figure withholding by using the payee's Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, and the applicable tables and methods in Publication 15‑T, Federal Income Tax Withholding Methods. Payees of periodic payments can give payers a Form W-4P in order to make or change a withholding election, or elect not to have withholding apply, for their periodic payments. Refer to Form W-4P for more information (including how withholding will be determined if a payee does not give a Form W-4P to the payer). Nonperiodic payments Unless a payee chooses another withholding rate, the default withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution, is 10% of the distribution. A payee can ask the payer to withhold at any rate (from 0% to 100%) using Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions. Distributions from an IRA that are payable on demand are treated as nonperiodic payments. Eligible rollover distributions A payer must withhold 20% of an eligible rollover distribution unless the payee elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. In the case of a payee who does not elect such a direct rollover, the payee cannot elect no withholding on the distribution. With certain exceptions, the taxable part of any distribution from a qualified plan, section 401(k) plan, governmental section 457(b) plan, section 403(a) annuity plan, or section 403(b) plan that can be rolled over to an IRA or other eligible retirement plan is an eligible rollover distribution. In general, qualifying “hardship” distributions, and distributions required by federal law such as required minimum distributions, are not eligible rollover distributions. Note, a payee may request a higher rate of withholding than the 20% default withholding rate on an eligible rollover distribution by filing a 2021 or earlier Form W-4P or a 2022 or later Form W-4R. Although the Form W-4R was available for use in 2022, the IRS postponed the requirement to begin using the new form until Jan. 1, 2023. For more information, see Chapter 8 in Publication 15-A, Employer’s Supplemental Tax Guide. Mandatory withholding on payments to be delivered outside the United States A payee who is a U.S. citizen or resident alien cannot elect no withholding for any periodic or nonperiodic payment to be delivered outside the United States or its possessions. See Publication 505, Tax Withholding and Estimated Tax, and Form W-4P or Form W-4R for more information. Withholding on payments to nonresident aliens (NRAs) The distributions to NRAs (are generally subject to withholding under IRC section 1441 (related to withholding of tax on NRAs), unless a tax treaty withholding exemption applies. Therefore, a payers, the withholding agents, should not rely on a Form W-4P or Form W-4R received from NRAs. See Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities (including “Pensions, Annuities, and Alimony (Income Code 15)”), Publication 519, U.S. Tax Guide for Aliens, and the Instructions for Form 1042-S. See also NRA withholding. Depositing and reporting withheld taxes Payers report income tax withholding from pensions, annuities, 403(b) plans, governmental section 457(b) plans, and IRAs on Form 945, Annual Return of Withheld Federal Income Tax. Payers do not report these withheld amounts on Form 941, Employers Quarterly Federal Tax Return. Payers must furnish Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. to payees and the IRS. Payers deposit such income tax withholding with any other nonpayroll withholding reported on Form 945 (e.g., backup withholding). Payers do not combine the Form 945 deposits with deposits for payroll taxes reported on Form 941 or nonresident alien withholding taxes reported on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. Circular E and the separate Instructions for Form 945 include information on the deposit rules for Form 945. For information on withholding and reporting on pensions and annuities paid to NRAs, refer to Pensions, Annuities, and Alimony (Income Code 15) in Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Related General instructions for certain information returns NRA withholding Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax code, regulations, and official guidance page. To access any Tax Court case opinions issued after Sept. 24, 1995, visit the Opinions search page of the United States Tax Court.
