IRS Proposes Withholding Tax on Retirement Plan Distributions for Recipients with a Non-U.S. Address
The Internal Service Revenue (IRS) proposed regulations on retirement plan distributions (retirement plans, IRAs and commercial annuities), requiring tax withholding if the recipient does not satisfy U.S. address requirements.
These proposed regulations would remove the option to elect out of federal tax withholding rules if the recipient provides the payer with:
A foreign address or no residence address at all.
A foreign address but distributes the funds to a bank or person within the United States.
A U.S. address but distributes the funds to a bank or person outside the United States.
If the recipient provides a military or diplomatic post office address outside of the United States, it will be treated as a U.S. address and they may elect out of withholding rules.
The proposed regulations do not apply to:
Retirement plan distributions classified as eligible rollover distributions, which are generally lump sum distributions or distributions paid over a 10-year period. These rollover distributions are usually subject to a 20% income tax withholding rate unless the payee elects to directly roll over the distribution to anther tax-qualified plan or IRA.
Non-resident aliens who are generally subject to a 30% tax withholding rate.
These proposed regulations are still being reviewed and payors should continue to rely on prior IRS guidance until the rules are finalized. Once these rules are finalized, the regulations would supersede the guidance in Notice 87-7 for payors of designated distributions with respect to their duty to withhold under sections 3405 (a) (1) or (b)(1). To determine whether you’re currently in compliance or for assistance with navigating these rules, contact Doeren Mayhew’s tax advisors today.