Required Federal Income Tax Withholdings from 401k Distributions

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

The IRS has various rules related to income tax withholding from 401k distributions. The most common rule is the minimum 20% that is required to be withheld from eligible rollover distributions. However other withholding requirements can result in either no required withholding or withholdings based on withholding tables used for wages.

Eligible rollover distributions are subject to a flat minimum withholding of 20%. The participant can elect for a higher withholding, but not a smaller amount. Eligible rollover distributions are distributions to the participants that were eligible to be rolled over to an IRA or other qualified plan, but the participant elected to receive the distribution.  These typically occur when a participant terminates employment with the plan sponsor prior to their retirement and withdraws their account balance.

Non-eligible rollover distributions include distributions that are allowed to be made while the participant continues to be employed by the plan sponsor and include “hardship” distributions, distributions required by law and “in-service” distributions. There is no minimum required withholding for these types of distributions.

Finally, withholding for “periodic” payments is based on withholding tables used for wages and can be zero is properly selected by the participant. Periodic payments would typically occur if elected by the participant upon their retirement from the plan sponsor.

Kim Lubbers, CPA

Comments

  1. Kyle Yardley says:

    Hello. I recently cashed out my 401k and made an honest mistake of withholding 45% instead of 25% which is what I meant to put in when I fill out my distribution form online. My provider is saying there is no way to fix this. I need this money, is there any forms you can obtain from the IRS to amend this?? Surely I’m not the first person to make a mistake on this…thanks!

    • admin says:

      Kyle –

      Thank you for your question and interest in our blog. The excess withholdings would be returned upon filing of your annual tax return. I am not aware of any other options for over withholding.

      Kevin Bach, CPA, CVA