IRA Withholding Notice and Election Requirements

Originally published in The Federal Credit Union Magazine.

Guest blog post by Jennifer Basset, writer/editor at Ascensus.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

With many of your members getting ready to take out their 2013 required minimum distributions (RMDs), now is the perfect time to brush up on the Individual Retirement Account (IRA) withholding notice and election requirements for credit unions.

Withholding is an important compliance issue for IRAs. Like withholding from a paycheck, IRA distribution withholding prepays income taxes. Taxes withheld from IRA distributions are credited against an individual’s total tax liability for the year. So not only is withholding required by law, it’s a valuable customer service that you provide your members.

Notice Requirement

For annual IRA distributions of $200 or more, your credit union must provide a withholding notice. This notice allows the member (i.e., the IRA owner or beneficiary) to choose exactly how much or what percentage they want withheld— including not having any withholding at all. Even if members choose not to withhold taxes from their distributions, they are still responsible for paying taxes on the distribution. The notice also lets them know they have the right to change their mind about how much they want withheld. If your credit union fails to give members a withholding notice, the IRS could assess a $10 penalty for each failure.

Frequency

If distributions are taken less frequently than quarterly, you must provide a withholding notice before each distribution, but no more than six months before each distribution. If distributions are taken quarterly or more frequently, you must provide the withholding notice once per year at a reasonable time before the first payment each year.

Format

To comply with the withholding notice requirements, credit unions must provide members with an IRS Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a substitute form. If your credit union offers a substitute form, the form must follow certain required guidelines or be submitted to the IRS for approval. These guidelines are outlined in IRS News Release IR-83-3.

To prove that the form has been sent to the member on a timely basis, you should date the form before mailing and retain a copy in the member’s file. You should send two copies to the member: one to keep and, if a change is desired, one to return with signature to your credit union.

Election

Members may elect to withhold 10 percent or more on IRA distributions. Members also may elect to waive withholding. The election is authorized when the member signs IRS Form W-4P (or a substitute form). Once your member makes a withholding election, it is valid until revoked. You should retain a copy of the election in the member’s file. If the member does not elect out of withholding, you must withhold 10 percent of the IRA distribution. A member may revoke an election at any time by signing another Form W-4P. Many credit unions integrate the withholding election into the withdrawal statement so that Form W-4P is available for each distribution. But when a member has established a series of scheduled payments, you may send a Form W-4P to the member according to the notice frequency stated previously.

Summary

Compliance with the IRS withholding notice provisions is all in the timing and retention. This may be the best time to get withholding notices out to all of your members who are scheduled for RMDs in 2013. It is also the right time to plan any other withholding notices that are needed to meet the IRA requirements.

Ascensus is the NAFCU Services Preferred Partner for IRA, Retirement Plan, and Health Savings Account (HSA) Solutions Software, Training, Documents and Consulting.

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