Here is my tax question:
Background – Male 64, retired.
Wife 72, retired.
Living in MD jointly filing taxes.
401k about $900,000
If I (the husband) die, I want to distribute the entire balance of the 401k and benefit my wife.
She will leave the country and our lawyer (Power of Attorney) will take care of the T. Rowe administrative conditions.
How do we prevent T. Rowe from withholding the mandatory 20% taxes from the 401k?
The only way to avoid the otherwise mandatory 20% tax withholding is to request a direct rollover to a traditional IRA and then take a distribution from the traditional IRA. There is no mandatory withholding on a direct rollover and tax withholding on a traditional IRA distribution can normally be declined. However, if she is a foreign person at the time of the distribution from the traditional IRA, there might be 30% mandatory tax withholding: https://www.irs.gov/retirement-plans/plan-distributions-to-foreign-persons-require-withholding
Thank you. I want to make clear, we understand taxes will be due on the 401k distribution, but we are trying to avoid TRowe deducting the tax pre-emptively. She will file taxes at the end of the year, like normal. Is it possible to make an adjustment on Form W4-P?
With regard to a distribution paid to your wife from the 401(k), Form W-4P can be used to increase the tax withholding beyond the mandatory 20%, not reduce it below the mandatory amount. Mandatory means mandatory.
Yes, indeed, mandatory. But I received this from T.Rowe last night saying:
"Submit a W-4P form: If you still want to withdraw funds from your 401(k) account, you can submit a W-4P form to your plan administrator to change the withholding rate. You can either reduce the withholding rate or choose not to have any taxes withheld at all."
So, now I'm completely confused. I understand these things are complicated, but there does seem to be a difference of opinion.
Can anyone verify one way or the other?
Regards,
Sean
You can use Form W-4P to reduce the withholding rate if you had previously requested withholding in excess of 20%, but you cannot reduce the withholding to below 20% on the amount that is eligible for rollover.
For portions of a distribution that are not eligible for rollover such as an RMD, the default (not mandatory) withholding rate is 10% and you can use Form W-4P to specify a withholding rate of either 0% or more than 10% on that portion. This is likely what the last sentence from the T. Rowe Price response is referring to.