Academic journal article Journal of Accountancy

Withholding on Retirement Plan Distributions

Academic journal article Journal of Accountancy

Withholding on Retirement Plan Distributions

Article excerpt

Anyone planning to change jobs or retire in 1993 and take a lump-sum distribution from his or her employer's qualified retirement plan should watch out. As of January 1, money withdrawn from an employer-sponsored, tax-deferred retirement plan is subject to a 20% withholding requirement.

Before January 1, anyone receiving a pension distribution in cash had 60 days to roll over the funds into an individual retirement account (IRA) or other qualified plan. Employees who changed jobs or retired before 1993 could decide whether to have tax withheld from a lump-sum distribution.

Under the new rules issued on October 15, 1992, amending tax code section 3405(c), unless the distribution is transferred directly into an IRA or other qualified plan, 20% will be withheld automatically. For example, assume Jack has $200,000 in his retirement account when he decides to changes jobs in 1993. If Jack requests the money be paid directly to him, his employer will give him only $160,000. The 20% difference ($40,000) will be withheld and remitted to tile Internal Revenue Service.

Jack will have 60 days to roll over the full account balance of the $200,000 to avoid an income tax liability. …

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