The IRS has issued Notice 2020-3, guidance in which the Service is proposing no change for 2020 in a procedure for determining tax withholding on periodic distributions from pensions, annuities, and “certain other deferred income.”
Withholding on nonperiodic or on-demand distributions is generally applied at a 10 percent rate (other than retirement plan-eligible rollover distributions subject to mandatory 20 percent withholding), and can also be waived. Periodic—generally annuitized—payments have withholding applied according to IRS wage withholding tables, with recipients electing the number of withholding allowances or waiving withholding. However, when a withholding election is not made (on IRS Form W-4P), the current default assumption for the 2019 tax year is for the payor to apply withholding as if the recipient is married and has claimed three (3) withholding allowances.
The IRS is proposing in this guidance to retain this assumption for the 2020 tax year for those who make no withholding election for such periodic distributions, but is receiving public comments on this proposal through February 17, 2020.