Withholding Taxes On Low-Income Retiree

[Guest SBlack]

70 1/2 participant has requested full distribution, but has also requested that we not withhold 20%. He claims that his income is not enough to file tax return (even including distribution). Can we do that or is there a possibility that we could be liable for the taxes on that distribution? Is this between the taxpayer and the IRS, or are we required to withhold?

[david rigby]

Paying the tax is between the IRS and the taxpayer. Doing the required withholding is between the IRS and the payor.

Assuming you are talking about a lump sum distribution, yes you have to withhold. But no withholding is required if the employee elects a direct rollover to an IRA.

[Kirk Maldonado]

The simple solution is to have the participant elect a direct rollover (to avoid the withholding). Because the withholding upon distributions from an IRA are voluntary, the person can get around the withholding rules this way.

[KIP KRAUS]

I agree with Kirk. However, It sounds to me like he needs the money if he's worried about the 20% witholding if he rolls it into an IRA and needs the money he may have early withrawal penalties from taking a distribution.

[Guest SBlack]

Thanks - you guys ROCK!

[Kirk Maldonado]

KIP KRAUS:

Why would the early withdrawal penalty apply if the participant is already over 70-1/2?

[KIP KRAUS]

Because the investment firm to which he rolls it over to could charge him an early withdrawal fee. I don't think that has anything to do with the 70 1/2 rule. It just has to do with investment compnay policy.