IRS Regulations Address Withholding on Retirement Payments Made Outside the U.S.

Scheduled for publication in tomorrow’s Federal Register are proposed IRS regulations on circumstances when income tax withholding must be applied to certain payments from retirement arrangements and commercial annuities.

Specifically, these regulations address required withholding for payments made to destinations outside the United States, or made to a U.S. financial institution by a person with no U.S. address. The proposed regulations are intended to replace IRS Notice 87-7, the primary guidance currently governing such withholding.

The proposed regulations are not intended to replace rules that apply to an eligible rollover distribution (ERD) from an employer-sponsored retirement plan; a mandatory 20 percent withholding rate generally applies to such payments (other than distributions from IRA-based employer plans). Also, these regulations do not alter the general rule that withholding may be waived for employer plan payments that are not ERDs (e.g., required minimum distributions); the regulations—in general—apply to IRA distributions.

Key provisions of these proposed regulations include the following.

  • As with Notice 87-7, the guidance would apply to both periodic—annuity, or similar—payments and nonperiodic payments.
  • In general, the proposed regulations would not apply to foreign nationals (those who are not U.S. citizens); other rules apply to these persons.
  • As before, a recipient who furnishes a payor with a U.S. residence address could generally waive the standard 10 percent withholding rate if the payment is not subject to mandatory withholding (e.g., an ERD).
  • A recipient who furnishes a U.S. residence address but requests that a payment be directed outside the U.S would not be permitted to waive withholding (this is a major change from Notice 87-7).
  • A recipient with a foreign address who requests that a payment be made to a financial institution within the U.S. also would not be permitted to waive withholding; the IRS cited “the ease with which funds deposited with a financial institution within the United States can be withdrawn by a person outside the United States” as the reason for this regulatory position.
  • Consistent with Notice 87-7, a recipient with a non-U.S. address only, or who does not furnish the payor with a residence address, may not waive withholding.
  • Recipients who furnish a military or diplomatic post office address (APO, FPO, or DPO) would be treated as having a U.S. residence address. A payment to such an address would be treated as being delivered to a U.S. address; therefore, the recipient could waive withholding on such payment if the payment was not subject to mandatory withholding (e.g., an ERD).

These proposed regulations would officially apply upon their approval in final form; until such time the guidance in Notice 87-7 would continue to apply. However, the regulations’ proposed recognition of military and diplomatic post office addresses as U.S. addresses may be relied upon in the interim.

Public comments must be received within 90 days of publication in the Federal Register; a public hearing will be held if requested in such public comments.

A pre-publication version of the proposed regulations can be found here.