When you receive non-wage taxable income, such as pension payments, you need to have income tax withheld. Internal Revenue Service Form W-4P, "Withholding Certificate for Pension or Annuity Payments," tells the paying organization how much to set aside. If these taxes are not withheld, you can end up with a fat bill at filing time and you may get hit with penalties as well.
Form W-4P Basics
A W-4P form is short -- just three lines. It resembles the W-4 you give an employer and has a similar purpose -- to ensure the right amount of tax is taken out of your paycheck. A W-4P provides withholding information for pension and annuity payments as well as periodic payments from life insurance contracts. It also is used to arrange withholding for taxable distributions from retirement plans like 401(k) accounts and IRAs.
Opting Out of Withholding
You can choose not to have income tax withheld from periodic payments you get from pensions, annuities or life insurance. To opt out of withholding, check the box on line 1 after you enter your name, address and Social Security number. If you do not submit a W-4P, the payer must take out tax by assuming your filing status is married and that you have three withholding allowances.
Withholding on Periodic Payments
If you elect to have taxes withheld from periodic payments, complete the "Personal Allowances Worksheet" that comes with the W-4P. Additional worksheets help you adjust the number of allowances claimed when you have more than one source of income or plan to file an itemized tax return. Enter the number of allowances on line 2 of the W-4P along with your marital status. If you want more tax withheld, write the amount on line 3. Sign and date the form and submit it to the payer.
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When you receive a non-recurring payment, such as a distribution from a 401(k) or traditional IRA, the IRS requires payers to withhold 10 percent of the taxable amount withdrawn. You can elect not to have taxes withheld by filing a W-4P and checking the box on line 1. Alternatively, you can ask for more tax to be withheld by entering an amount on line 3. Line 2 is not used for nonperiodic payments. If you're okay with the 10 percent withholding amount, you don't need to submit a W-4P.
A special IRS rule applies to taxable distributions from retirement plans that are rolled over into another retirement account. Payers must withhold 20 percent of rollover withdrawals. You cannot use a W-4P to opt out of this withholding, although you can submit one to ask for more tax to be withheld. However, you can ask the plan trustee to perform a direct trustee-to-trustee transfer instead of withdrawing the money and depositing it in the new account yourself. The 20 percent withholding rule does not apply to direct transfers.
The IRS suggests that you complete and submit a W-4P as soon as you can so the payer can begin withholding the right amount of tax. Once you file the form, it stays in effect indefinitely. You do not need to renew it each year. However, you can complete and submit an updated W-4P when you need to change the withholding amount.