Overview

Over the past several months there have been a lot of questions about the new Internal Revenue Service (IRS) Form W-4R, Deed of Retention for Untimely Payments and Allowable Distributions, and revised retention options applicable to individual retirement account (IRA) distributions. This article will answer many of these questions.

Remaining in 2022

Since 1975, when IRAs first became available, recipients of IRA distributions (ie, IRA owners and IRA beneficiaries) have had to deal with federal income tax withholding issues when receive tax distribution. For most of these years, the withholding election was reported on IRS Form W-4P, Retention certificate for periodic pension or annuity payment. This continues through 2022 because Form W-4P can be applied to taxable IRA distributions taken in 2022 unless the recipient elects to use the 2022 version of IRS Form W-4R. not necessarily used in 2022.

Protection from 2023

Beginning in 2023, Form W-4P will be replaced by IRS Form W-4R for IRA distributions that fall within the definition of untimely paymentswhich is basically all payments payable on demand. This includes designated sections except per annum or similar periodic payments. Form 2023 of Form W-4R will be necessary used effective January 1, 2023, or 30 days after the later of the IRS issuance date. The 2022 version of Form W-4R is an acceptable option to use for informal IRA distributions taken in 2023 until 2023 or must be used.

One interesting change with Form W-4R is that it allows the election to remain between zero and 10 percent, but Form W-4P does not. If an IRA participant fails to make a withholding election, the 10 percent withholding will still be the default rate for federal income tax withholding. Also note that Form W-4R is updated by the IRS each year to include the current marginal tax rate table, which a recipient may use to determine the amount of tax owed on of federal income withheld. Wolters Kluwer provides Form W-4R (Form IRA-W-4R-LAZ) which is updated annually, after the IRS publishes its version, to show the table of marginal tax rates and changes different.

Annual withholding notice

A long-standing requirement that will not change is that a trustee/trustee who is set up to receive scheduled distributions be provided with an annual notice reminding them of their ability to change their previously held election. Recipients of distributions made quarterly or more frequently (eg, monthly, weekly, but to recipients of distributions made more frequently than quarterly) must be given one notice per year. (eg, semi-annually or annually) notice must be given before each episode. In any case, it cannot be sent more than six months before the scheduled episode. Also remember that unless there is a change, the IRA shareholder’s previous election regarding federal withholding remains in effect until changed. Additionally, beginning in 2023, Form W-4R must be used for all changes to previously made non-final elections.

Wolters Kluwer design users should note that the Notice of Custody (Form WK IRA-50-LAZ), which is one of two forms provided by Wolters Kluwer to remind IRA owners of their ability to change previously held elections, has been updated to refer to Form W-4R, removes the reference to the Form. W-4P. In addition, the Wolter Kluwer IRA Notice on Holding Traditional and Simple IRAs (Form IRA-50W-4PLZ) was replaced by IRA Notice on Holding Traditional and Simple IRAs (Form IRA-50WITHLZ).

Conclusion

Although this may seem like a lot of changes to understand, it can help to remember that most of the principles that hold no change! What has changed is that in 2023, a new election form must be used to file federal income tax withholding on IRA distributions – Form W-4R. And, because there are so many requirements for providing a substitute Form W-4R, Form W-4R will not be part of the Wolters Kluwer distribution or election-related forms. This means that supervisors/managers using Wolters Kluwer’s forms need to file a separate W-4R form when handling distributions related to federal elections.

For more information on federal tax withholding changes applicable to IRA distributions classified as casual payments, click here.

To learn more about IRAs and other tax-advantaged accounts, including health savings accounts and Coverdell Education Savings Accounts, check out the Wolters Kluwer IRA Library or the on-demand video training offered at various topics. Go here to learn more about the training opportunities available to you, or you can call us at 1-800-552-9408.



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