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