Form W-4R, A New Form for 2023?

[scrabbler1]

My dad's investment advisor told me yesterday that there is a new form for tax withholding from non-periodic and eligible rollover distributions. It is called W-4R. It's a short form, just your personal info and a percentage of the distribution you want to have withheld for federal taxes. There are specific rules for default withholding rates, depending on the type of distribution and where you live (U.S. or non-U.S.). The form goes to the payer of the distribution, the way a W-4 goes to your employer.

Here is a link to the form: https://www.irs.gov/pub/irs-pdf/fw4r.pdf

Many of us enter a withholding percentage into an investment company's website. Does this mean we have to complete this form, too? Or might the company's website somehow take that info and create a Form W-4R automatically?

 

[djsander]

Wow three pages of a government form to tell them something other than the standard withholding rate. Our government at its finest. I wonder how many millions were spent to come up with that one!

 

[Al18]

I just looked at the IRS instructions linked above.

This is disturbing

Eligible rollover distributions—20% withholding.
Distributions you receive from qualified retirement plans (for example, 401(k) plans and section 457(b) plans maintained by a governmental employer) or tax-sheltered annuities that are eligible to be rolled over to an IRA or qualified plan are subject to a 20% default rate of withholding on the taxable amount of the distribution. You can’t choose withholding at a rate of less than 20% (including “-0-”). Note that the default rate of withholding may be too low for your tax situation. You may choose to enter a rate higher than 20% on line 2. Don’t give Form W-4R to your payer unless you want more than 20% withheld.

20% tax on 401K to IRA rollovers? What the hell?

 

[jebmke]

I just looked at the IRS instructions linked above.

This is disturbing

20% tax on 401K to IRA rollovers? What the hell?

The amount in Box 1a is generally zero for direct rollovers so this is 20% of zero.

 

[Al18]

Oh - thanks for the clarification

 

[Koolau]

Wow three pages of a government form to tell them something other than the standard withholding rate. Our government at its finest. I wonder how many millions were spent to come up with that one!

Well, at least the 87000 new agents will have something to do - reading all the 3 page documents - looking for revenue enhancement opportunities - er, I mean tax payer errors.

 

[MichaelB]

This could be an informative and useful thread discussion if we forgo the snark …

 

[Gumby]

What this is effectively going to do is preclude the ability to specify zero withholding on Roth conversions and then pay those taxes with after-tax dollars, which is one of the things that has heretofore sweetened the deal on Roth conversions.

 

[RunningBum]

What this is effectively going to do is preclude the ability to specify zero withholding on Roth conversions and then pay those taxes with after-tax dollars, which is one of the things that has heretofore sweetened the deal on Roth conversions.

I've already done a Roth conversion in 2023 and didn't see anything about having to withhold tax or supply this form. I recall the usual questions asking if the IRS has required me to do withholding and an option to have some % withheld, which I skipped over.

 

[braumeister]

I've already done a Roth conversion in 2023 and didn't see anything about having to withhold tax or supply this form. I recall the usual questions asking if the IRS has required me to do withholding and an option to have some % withheld, which I skipped over.

The final form was just released on 9 Jan, so it will not become mandatory until 30 days later.

 

[RunningBum]

For someone not yet 59.5 doing a Roth conversion, won't this trigger an early withdrawal penalty?

 

[jazz4cash]

The amount in Box 1a is generally zero for direct rollovers so this is 20% of zero.

Box 1a is 1st name and middle initial!
There are two types of non periodic distributions described:

• 
  [*]For nonperiodic payments, the default withholding rate is 10%. You can choose to have a different rate by entering a rate between
  0% and 100% on line 2. Generally, you can’t choose less than 10% for payments to be delivered outside the United States and its
  territories
  • 
    
    • For an eligible rollover distribution, the default withholding rate is 20%. You can choose a rate greater than 20% by entering the rate
    on line 2. You may not choose a rate less than 20%.
    
    

I don't think these are changes from prior years.
The 1st type of distribution described implies it is for IRA's and you can choose 0-100%. Default is 10%.

The 2nd type of distribution states workplace plans (401k's, 457's, etc.). Usually, we get around the mandated rollover withholding by using a trustee to trustee transfer.

Super confusing, Super annoying.

 

[jebmke]

Box 1a is 1st name and middle initial!
There are two types of non periodic distributions described:

• 
  [*]For nonperiodic payments, the default withholding rate is 10%. You can choose to have a different rate by entering a rate between
  0% and 100% on line 2. Generally, you can’t choose less than 10% for payments to be delivered outside the United States and its
  territories
  • 
    
    • For an eligible rollover distribution, the default withholding rate is 20%. You can choose a rate greater than 20% by entering the rate
    on line 2. You may not choose a rate less than 20%.
    
    

I don't think these are changes from prior years.
The 1st type of distribution described implies it is for IRA's and you can choose 0-100%. Default is 10%.

The 2nd type of distribution states workplace plans (401k's, 457's, etc.). Usually, we get around the mandated rollover withholding by using a trustee to trustee transfer.

Super confusing, Super annoying.

My typo. I meant 2a on the 1099-R. If you look at the instructions for 1099-R the payer enters the taxable amount as zero on the 1099-R so a direct rollover has no amount in Box 2a so there is no withholding since there is no taxable distribution. Box 7 will be coded "G" so there is no income reported on the 1040.

A custodial transfer for a Traditional IRA (to a Traditional IRA at another institution) doesn't even generate a 1099-R so the whole point is moot. There is no taxable income so no withholding.

 

[joesxm3]

So does this mean we can still pick 0% withholding for Roth conversions?

 

[Gumby]

What this is effectively going to do is preclude the ability to specify zero withholding on Roth conversions and then pay those taxes with after-tax dollars, which is one of the things that has heretofore sweetened the deal on Roth conversions.

On further reflection, maybe that is not the case, but you are going to have to send your trustee the form ahead of time.

 

[obsessed]

I just looked at the IRS instructions linked above.

This is disturbing

20% tax on 401K to IRA rollovers? What the hell?

There has always been 20% withholding required on rollover distributions where a check is written to taxpayer from the originating account (i.e. 401K) and the taxpayer then contributes the money to the new account (i.e. IRA). If you completed the transaction within 60 days, the transaction wasn't taxable but you still had the withholding, meaning you had to come up with the extra dollars to fund the new account.

I assume that is the situation that this form is trying to address and that direct rollovers are still not subject to withholding. The old W-4P addressed this but this new form does not.

 

[jazz4cash]

My typo. I meant 2a on the 1099-R. If you look at the instructions for 1099-R the payer enters the taxable amount as zero on the 1099-R so a direct rollover has no amount in Box 2a so there is no withholding since there is no taxable distribution. Box 7 will be coded "G" so there is no income reported on the 1040.



A custodial transfer for a Traditional IRA (to a Traditional IRA at another institution) doesn't even generate a 1099-R so the whole point is moot. There is no taxable income so no withholding.

IMO it’s moot because this is about W4P/R, not 1099. I knew you were referring to a different form and that was adding to the confusion. I’m ticked off right now because my credit union is forcing me to withhold 20% for some reason. Honestly the IRS is insane for thinking all these rules around distributions and transfers can be enforced. Who gives a damn as long as I pay tax on distributions the withholding is trivial, esp as they seem to be doing away with RMDs.

 

[scrabbler1]

On further reflection, maybe that is not the case, but you are going to have to send your trustee the form ahead of time.

OP here. This concerns me, too. A few months ago, my dad had a small cash crunch and asked his advisor to send $5,000 from his IRA to his bank account. But, because I handle his taxes, if I needed to adjust his withholding, his advisor would have to wait for me to get a revised W-4R sent to her. I expect to be able to recalculate his taxes with the additional withdrawal done fast enough to not delay his getting the money. I do have POA over his account so he would not need to sign the form itself. Of course, we could go with the default, or whatever percentage we used for his last withdrawal (which might be 0% or something more than 10%). Still, this may take more time than my simply redoing his taxes and shooting an email or phone call to his advisor with the appropriate withholding percentages. This form is an obstacle, and a needless one IMHO.

Another obstacle, somewhat unrelated to the new form, is the fact that my dad's investment company's system does not allow withholding percentages between 1% and 9%. I can choose 0%, 10%, or anything more than 10%. That kinds sucks because I have wanted to choose a percentage in the single-digit range. So, either I have to withhold too much or too little. That is, until the advisor found a way around that: Because the withdrawal comes from two different sources within my dad's IRA, I could choose 0% for one account and something at least 10% for the other. This begs the question, "How would that tactic be done using form W-4R? Could multiple percentages be used for this type of withdrawal with W-4R?"

 

[target2019]

Eligible rollover distributions—20% withholding.
Distributions you receive from qualified retirement plans (for
example, 401(k) plans and section 457(b) plans maintained
by a governmental employer) or tax-sheltered annuities that
are eligible to be rolled over to an IRA or qualified plan are
subject to a 20% default rate of withholding on the taxable
amount of the distribution. You can’t choose withholding at a
rate of less than 20% (including “-0-”). Note that the default
rate of withholding may be too low for your tax situation. You
may choose to enter a rate higher than 20% on line 2. Don’t
give Form W-4R to your payer unless you want more than
20% withheld.

Emphasis on last sentence--don't use W-4R for rollover unless you want more withheld. I can see the insurance companies I've dealt with getting things wrong for an FBO check.

 

[jebmke]

IMO it’s moot because this is about W4P/R, not 1099. I knew you were referring to a different form and that was adding to the confusion. I’m ticked off right now because my credit union is forcing me to withhold 20% for some reason. Honestly the IRS is insane for thinking all these rules around distributions and transfers can be enforced. Who gives a damn as long as I pay tax on distributions the withholding is trivial, esp as they seem to be doing away with RMDs.

If one does an eligible rollover of say, a 401(k) to a Traditional IRA then the "taxable amount" (this is the term used in the W4R instructions) is zero. The sending institution knows this and even if you specify a w/h rate they should not be withholding because there is no taxable amount.

Naturally, it is prudent to verify this with the institution as they don't always follow reporting rules correctly. Banks are notoriously un-good at payer tax reporting.

 

[Out-to-Lunch]

In addition to what jebmke said: Doesn't all of this pertain solely to indirect rollovers? The language refers to "Distributions you receive from qualified retirement plans." (Emphasis added.) For a direct rollover, I believe that the IRS does not deem that "you receive" anything.

I think the "eligible for rollover" language is referring to the indirect rollover case, where you take possession of the money, but are "eligible" to put it back in to a tax-deferred account for 60 days.

 

[always_learning]

What this is effectively going to do is preclude the ability to specify zero withholding on Roth conversions and then pay those taxes with after-tax dollars, which is one of the things that has heretofore sweetened the deal on Roth conversions.

Doesn't the instruction for Line 2 allow for no withholding and the option to use after-tax dollars in estimated payments? I am very new to this so I could be reading it wrong but it sounds like nothing has changed.

Less withholding (nonperiodic payments only). If permitted, you may enter a lower rate on line 2 (including “-0-”) if you want less than the 10% default rate withheld from your payment. If you have already paid, or plan to pay, your tax on this payment through other withholding or estimated tax payments, you may want to enter “-0-”.


I keep reading the instructions and can't figure out what has changed to require this form all of a sudden. Unless it's simply adding an official form so the taxpayer can be more informed of the withholding rules that were already in place?

I've only ever done one rollover and one conversion so I'm just a baby at this, but I can't see anything different than before. What am I missing?

 

[Gotadimple]

The following from Schwab (an email laying out the timeline for delivering documents during tax season):
"For nonperiodic payments, the default withholding rate is 10%. For eligible rollover distributions, the default withholding rate is 20%. Clients can choose to have a different rate by entering a rate between 0% and 100%, either digitally or on the appropriate Schwab form. Generally, clients can’t choose less than 10% for payments to be delivered outside the United States and its possessions."

 

[Gumby]

Doesn't the instruction for Line 2 allow for no withholding and the option to use after-tax dollars in estimated payments? I am very new to this so I could be reading it wrong but it sounds like nothing has changed.

Less withholding (nonperiodic payments only). If permitted, you may enter a lower rate on line 2 (including “-0-”) if you want less than the 10% default rate withheld from your payment. If you have already paid, or plan to pay, your tax on this payment through other withholding or estimated tax payments, you may want to enter “-0-”.


I keep reading the instructions and can't figure out what has changed to require this form all of a sudden. Unless it's simply adding an official form so the taxpayer can be more informed of the withholding rules that were already in place?

I've only ever done one rollover and one conversion so I'm just a baby at this, but I can't see anything different than before. What am I missing?

If you read later, I changed my mind. But if it requires sending in the form ahead of time, it will be a pain. I'm hopeful that it can be done the way I've always done them with Vanguard - I just put in the percent I want withheld in the proper box on the website when I make the Roth conversion or distribution.

 

[always_learning]

If you read later, I changed my mind. But if it requires sending in the form ahead of time, it will be a pain. I'm hopeful that it can be done the way I've always done them with Vanguard - I just put in the percent I want withheld in the proper box on the website when I make the Roth conversion or distribution.

Whoops! I don't know how, but I missed your other post. I was actually heading back here to split my post into two because the part I wrote after addressing your comment was meant for the board at large and the way I wrote it seemed as if I was asking you personally what I was missing.

Anyway, I've been reading and rereading the form's instructions and info on the IRS site and I still come back to thinking that things won't change and that it's just another form to fill out. It sounds like they split what used to be covered in one form, into two.

Like you, I am hopeful that we can address the withholding at the time of conversion/distribution. It makes no sense to have to do it ahead of time.