The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from Connecticut is representative of a common inquiry related to Coronavirus-Related Distributions (CRDs). The advisor asked:
“I know that CRDs are not subject to federal income tax withholding of 20% for qualified plan distributions, but what about state income tax withholding? My client is a resident of Connecticut.”
Highlights of the Discussion
To be clear, a CRD is not subject to the federal mandatory 20% withholding requirement as required under Internal Revenue Code (IRC) § 3405(c)(1) if such an amount is paid from a qualified retirement plan. However, a CRD, whether paid from a qualified retirement plan or an IRA, remains subject to the federal voluntary 10% withholding rules of IRC 3405(b)—unless waived by the recipient (Notice 2020-50).
The application of state tax withholding on CRDs is dependent on each state’s tax laws (see this list of state government websites). For example, Connecticut addresses the issue in Question 3 of a CRD Q&A:
“Are coronavirus-related distributions from a qualified retirement account, as allowed under the CARES Act, subject to Connecticut income tax withholding? Generally, yes. The payer is required to withhold 6.99% from the distribution unless the recipient submits a Form CT-W4P to the payer requesting that no or a lesser amount of Connecticut income tax be withheld.”
For state tax withholding rules, it is important to consult a tax advisor who is well versed in state tax issues.
Conclusion
For any tax issue, seek the guidance of a financial professional. The federal tax withholding rules for CRDs are explained in IRS Notice 2020-50. State tax withholding rules are state dependent, making the guidance of a state tax expert even more necessary.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2020, Retirement Learning Center, LLC. Used with permission.
