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

[cocoanuts]

Today I spoke with Fidelity to remind them to withhold state and federal taxes from my 401K savings plan RMD this year. (Last year they forgot to, so I had to make estimated tax payments to cover that.) Fidelity said I can no longer tell them to withhold 10% or a set dollar amount but must fill out the new W-4P per the IRS. And failing that, they will withhold the default amount (married, 3 deductions). I am single, no deductions. I next spoke with Morgan Stanley who issues my IRA RMD, and they said they were not aware of any new "law or rule" and that they plan to withhold 15% for state and 15% for federal as before.  I read the IRS W-4P form instructions, and it seems to say that form is used for periodic pension payments or annuities. Are those the same as RMD's? I am thinking the W-4P is for my pension payments not my annual RMDs. Thanks. 

[Anonymous_]

I'll page @dmertz 

[VolvoGirl]

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.    

[cocoanuts]

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. 

[dmertz]

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.

[cocoanuts]

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. 

[VolvoGirl]

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

[cocoanuts]

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."

[dmertz]

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

[cocoanuts]

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. 😑 

[dmertz]

"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.

[cocoanuts]

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. 

[vsefcik]

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?

[cocoanuts]

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. 😋

[VolvoGirl]

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.