Do I Need a W-4P Form for RMD Tax Withholding?

I'll page @dmertz 

Maybe you can log into your Fidelity 401K account and change it on there.   I've done that with my IRA and 401K accounts.  I think the 401K plans are lumped together with Pensions plans.  They both go on 1040 line 5.   Yeah what they told you doesn't sound right.  I would call Fidelity again and get someone else.    

Thanks. I do not have an "issue" with filling out the W-4P form. I reviewed it, and it is simple with each of my entries being blank (not applicable) except for step 5 which is my signature. I spoke with two reps at Fidelity yesterday, and the second rep said I could call back to "update" my form within the next 7 days and that would work (versus completing the form, signing, scanning and returning}. My question goes to the correctness of their interpretation of the "new rule" and if it actually applies to RMDs. 

I don't think that the rule is new.  I think that some plan administrators have been allowing alternative methods of specifying withholding and treating that equivalent to submitting a W4-P.  However, I do believe that the IRS mandates the use of an actual Form W4-P to increase the default federal tax withholding and the IRS might simply be increasing enforcement of the requirement.  (Because an RMD is ineligible for rollover, the default tax withholding is 10%.)  There is likely a different but similar form for state tax withholding.

I suspect that the IRS mandates the use of the actual form because the form also includes the instructions which provide important information to the individual.  The rules are different for IRA distributions where there is no IRS requirement to use a particular form.

Thanks for the clarifications. Your "because an RMD is ineligible for rollover, the default tax withholding is 0" statement is interesting. I certainly owe taxes on my RMDs since they are treated as ordinary income, right? Fidelity did not mention what the requirement is to withhold state tax for me. (I need to ask.) It sounds like there won't be one. You are saying my RMD from my IRA at Morgan Stanley is treated differently than the RMD that will be withdrawn from my 401K? In my mind, an RMD is an RMD regardless of the source. That may explain why my Morgan Stanley financial manager is not aware of the IRS mandate (because it does not apply?). What I find odd about the W-4P form is that when completed, all of my entries for steps 1-4 are blank except for step 5, the signature. It provides no information to Fidelity whatsoever. It sure looks like I will need to do estimated tax payments every year to cover this situation which is what I am endeavoring to avoid. 

I think he meant the default withholding is 10 or 20%.  missed a digit.  

Thanks. The second Fidelity rep I spoke to said that if I did nothing, did not provide the W-4P, the default withholding would be "married, with 3 deductions." I have no idea if that equates to 10%. Ten percent would be better than nothing. And while I am thinking about this, my advisor at Morgan Stanley said, "Fidelity must already have a W-4 in your file because they were withholding taxes for you previously."

Yes, I meant to say that the default is withholding is 10%.  Thanks.  I've made the correction.  Because an RMD is ineligible for rollover you don't have the mandatory 20% withholding that would normally apply to distributions from qualified retirement plans, so you can use Form W4-P to decline withholding or have some other amount withheld.

The default withholding that Fidelity mentioned is for periodic distributions (distributions in the form of annuity), not for nonperiodic distributions from retirement accounts.  Since you mentioned that this is an RMD from a 401(k), I assume that it is a nonperiodic distribution (even if you have a standing order for Fidelity to make the distribution on a particular date each year).  See 26 U.S. Code § 3405:

https://www.law.cornell.edu/uscode/text/26/3405

OK now I recall one rep saying that the IRS recently recharacterized the RMD as periodic. It wasn't before. So that is why they need an updated W-4P. This is why I was asking here. Got the feeling they might be incorrect in their interpretation of the new rule but wanted to check. The RMD is mandatory, of course, and sent annually whether or not I request. That does seem periodic. 

UPDATE: Just spoke with Fidelity to "update" my W-4P per their requirement. All the steps/lines on the form are 0 or blank for me. When we were done with the form, I asked how much tax would be withheld by Fidelity and the reply was, "You need to speak to your tax preparer to find out what tax bracket you are in."  So, I asked about state taxes and if they had a form for that and they said, "We no longer withhold taxes for state."  Guess I am doing an estimated tax payment for state. 😑 

"the IRS recently recharacterized the RMD as periodic."

I don't think that the IRS has done that (or can even do that at all without a law that changes the tax code).  The IRS still might be requiring the payer to take instructions from a Form W-4P, but it's not because RMDs are necessarily periodic payments.

Periodic payments are defined in section 3405(e)(2) of the tax code:

(2)Periodic payment
The term “periodic payment” means a designated distribution which is an annuity or similar periodic payment.

This means that periodic payments are those distributions received as an annuity or a defined benefit plan that is in payout status.  It says nothing about RMDs.

For distributions from retirement accounts that are not annuities or defined benefit plans in the payout phase, RMDs are simply a minimum amount required to be distributed.  The individual can take these distributions at any time during the year and can take more than the required minimum, so these are not periodic payments even if the payer has been requested to make distributions on a regular basis.

I agree that the tax code does not specifically mention RMDs. The W-4P form doesn't either. Doesn't matter. I have no power or influence here. Fidelity is the payer, and I must yield to their knowledge (or misinformation). 

I have now spoken with 3 Fidelity reps; none will back down. Today's representative said federal taxes will be withheld "single, no deductions" based on my form update. 

I may have written earlier that I felt their interpretation could be incorrect.  Thanks for your input. 

I am having the same issue with Fidelity.  Last year they allowed me to specify a withholding percentage but won't do so this year.  I noticed on the W-4P form that step 4c allows specifying an amount to be withheld.  Do you ask Fidelity if this step can be used?

Yes, thanks, I did ask about that line. It is for EXTRA withholding beyond what they plan to withhold. Since I do not know the amount they PLAN to withhold, I do not know if I need to ADD another amount. Takes more brains than I have needed to figure that out. I love when they say, "You need to check with your accountant." Right, we would not be doing our own taxes with online software if we all had accountants. 😋

Well if the default amount they take out isn't enough then have extra added to it.  Or you will have to increase the withholding on some other income you get or send in quarterly estimated payments.   

Exactly. I will send in an estimated tax payment by Jan 15th. (BTW, the amounts are unknown.)

An additional thought with regard to this.  I would expect that for distributions from the 401(k) that are not made in the form of annuity would mean providing the payer with Form W-4R, not Form W-4P.  The instructions for Form W-4R define periodic payments as those received in "installments."  I don't see how RMDs could be considered to be amounts paid in installments since the distribution is not restricted to the just the minimum required.

I just got off the phone with Fidelity and I, too, was told that the default withholdings have decreased and that if I wanted my standard 10% withholding on my RMD distribution I would need to complete Form W4-P.  It appears after reading the form that it is for periodic payments and not for my lump sum RMD payment.  I'm so confused.  I'm going to call Fidelity back.  

I spoke with 3 reps at Fidelity. They were trained to begin using the W-4P form this year. I ended up just filling out the form on the phone for them (all my lines were zero). And they no longer withhold taxes for state.  Oh, and one of them said early on that the RMD is now considered periodic and was not before. That is how they were trained. 

Has anyone asked their Fidelity rep if form W-4R can be used?  The instructions for this form include the statement "Complete Form W-4R to have payers withhold the correct amount of federal income tax from your nonperiodic payment or eligible rollover distribution from an employer retirement plan, annuity (including a commercial annuity), or individual retirement arrangement (IRA)."

Because the two reps at Fidelity that I spoke to insisted that the RMD is now considered "periodic" and was not previously, I did not suggest that form, even though I read the same thing on the IRS website. I am unable to track this "change" or when it happened, only that Fidelity insists their company training and the IRS want it handled via the W-4P. 

I talked with a Fidelity rep today.  When I asked about using Form W-4R she said that I could use it.  However, five minutes after we ended the conversation she called me back and said that she was wrong.  Form W-4R cannot  be used and Form W-4P must be used.  We then filled out the W-4P form during the phone conversation and I left all lines blank except Step 4(c) (Extra Withholding).  I specified an amount which was a guess of what my tax withholding should be. 

I have two IRA accounts at Fidelity, a 403(B) and a DCP (Defined Contribution Plan).  I have to complete another Form W-4P for the DCP account next week, after the RMD for the 403(B) plan is distributed.  The W-4P for the DCP will be to specify a different amount for Step 4(c).  I then will try to determine if I need to make an estimated tax payment in mid-January, 2024.

I have an IRA account at Morgan Stanley. My advisor there has already issued my RMD from that account. He took out 15% for state and 15% for federal as he always has. Told me in October that he has no knowledge of any IRS change in how withholding is to be handled (when I mentioned what Fidelity said). Fine by me.

As far as I can tell, using Form W-4P and leaving Step 2 blank will result in tax withholding equal to the expected tax liability as if your distribution from the corresponding account plus one-half of the standard deduction for your filing status is the only income being reported on your tax return.  Any amount that you specify on Form W-4P line 4(c) is an additional amount of withholding beyond that.  For example, if you file as Single for 2023 and leave Step 2 blank, withholding on an annual periodic payment of $30,000 would be $2,750 plus whatever amount you specify on line 4(c).  See Worksheet 1B of IRS Pub 15-T for details:  https://www.irs.gov/pub/irs-pdf/p15t.pdf

Just for closure sake, I finally received my RMD from Fidelity. They did NOT withhold any federal taxes at all (my discussion with them after filling out the W-4P form was that a "default" amount of 10% would be withheld).  And as I expected, NO state taxes were withheld either. I asked them to please deposit the RMD directly into my bank account as they have that information because of recent mailbox thefts. They MAILED it to me, and it took over 10 days to receive (each day checking the mailbox for fear of theft). Last week, I REMOVED my 401K from Fidelity and opened an IRA with another financial institution. I am so done with Fidelity. Today, I am making estimated tax payments to both state and federal to cover what Fidelity continues to call a "mishap." 

P.S. When I spoke to Fidelity on December 6, they said no taxes were withheld because I failed to indicate an amount in the ADDITIONAL TAXES line on the form. What??!!