RMDs - calculate withholding via W-4P?

[AlbanyConsultant]

I have a client who, when requesting his RMD, sent a W-4P "so I could calculate the withholding". Huh?

Usually, participants complete a distribution form that lets them indicate a percentage or amount to withhold. Is this really the way it's supposed to be done? Is there some kind of easy conversion chart from "W-4P deductions" to "percent to withhold"? Thanks.

[GMK]

The part of your distribution form where the Participant can indicate a percentage or amount to withhold on the RMD is a substitute form for the Form W-4P.

If they send a W-4P with information in item 2, you have to calculate withholding from the tax tables, the same as for payroll income tax withholding. (Yeah, kind of a pain.)

[My 2 cents]

RMDs are taxable and subject to withholding. In the absence of direction from the recipient, how would you determine the withholding?

[AlbanyConsultant]

RMDs are taxable and subject to withholding. In the absence of direction from the recipient, how would you determine the withholding?

We usually get direction on a plan distribution form, but this person didn't complete that and sent a W4-P instead.

[AlbanyConsultant]

The part of your distribution form where the Participant can indicate a percentage or amount to withhold on the RMD is a substitute form for the Form W-4P.

Thanks. I don't suppose there is anything I can point to to show this guy that such a thing is kosher?

[GMK]

RMDs are taxable and subject to withholding. In the absence of direction from the recipient, how would you determine the withholding?

Withholding on RMD's is 10% unless the recipient elects 0% or more than 10%.

[BG5150]

Maybe the person is getting confused with the Allowances worksheet. It's only to be used with periodic or annuity payments.

(To be honest, I'd have no idea how to apply it if somebody put something in there. I'm not sure if my software has a place for that)

[GMK]

The part of your distribution form where the Participant can indicate a percentage or amount to withhold on the RMD is a substitute form for the Form W-4P.

Thanks. I don't suppose there is anything I can point to to show this guy that such a thing is kosher?

Well, lots of places offer a substitute W-4P (google "substitute w-4p").

But the W-4P should be A-OK for you, because at the end of the first page of instructions in:

https://www.irs.gov/pub/irs-pdf/fw4p.pdf

(bottom of second column on page 3 of the pdf), it says that you can't use line 2 for non-periodic payments, so if the recipient uses the form W-4P, then the recipient can only select no withholding (line 1) or a dollar amount (line 3).

[AlbanyConsultant]

Isn't an RMD "periodic"? It's every year. This is from IRS.gov:

Withholding on Periodic Payments

Generally, periodic payments are pension or annuity payments made for more than 1 year 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 wage withholding purposes, these payments are treated as if they are wages . You can figure withholding by using the recipient's Form W-4P, Withholding Certificate for Pension or Annuity Payments , and the income tax withholding tables and methods in Publication 15, Circular E, Employer's Tax Guide, or the alternative tables and methods in this publication.

Recipients of periodic payments can give you a Form W-4P to specify the number of withholding allowances and any additional amount they want withheld. They may also claim exemption from withholding on Form W-4P or revoke a previously claimed exemption. If they do not submit a Form W-4P, you must figure withholding by treating a recipient as married with three withholding allowances. Refer to Form W-4P for more information.

Or is that overruled by the specific clause in the W-4P instructions (assuming that payment of an RMD is "on demand" since it can be requested at any time during the year, and co-opting the IRA rule) {emphasis mine}:

Nonperiodic payments—10% withholding. Your payer must withhold at a flat 10% rate from nonperiodic payments (but see Eligible rollover distribution—20% withholding on page 4) unless you choose not to have federal income tax withheld. Distributions from an IRA that are payable on demand are treated as nonperiodic payments. You can choose not to have federal income tax withheld from a nonperiodic payment (if permitted) by submitting Form W-4P (containing your correct SSN) to your payer and checking the box on line 1. Generally, your choice not to have federal income tax withheld will apply to any later payment from the same plan. You cannot use line 2 for nonperiodic payments. But you may use line 3 to specify an additional amount that you want withheld.

[GMK]

My understanding is that periodic payments look like installments paid on a prearranged regular schedule (first of each month, fifth of every July, and like that) in substantially equal amounts, like payments on a loan or from an annuity.

RMD's are paid when the Participant requests them (could be in January, could be in December), not on a prearranged schedule. And while RMD's might turn out to be substantially equal from year to year, they can vary significantly, for example, if the market rockets up or down or the Participant takes additional distributions that substantially reduce the account balance.

Line 2 on the W-4P is for withholding from a string of payments that are on a known, regular schedule.