What is Retirement Plan withholding?

Answer:
When withdrawing funds from your employer-sponsored retirement account,

the federal government mandates a mandatory withholding of 20% for federal income taxes unless the funds are being rolled over into a qualified retirement plan such as an IRA or if the withdrawal is less than $200.

This 20% retirement plan withholding amount may not be enough to cover your tax liability especially if you are making an early withdrawal and are subject to the 10% early withdrawal penalty. In addition, if you are in a higher tax bracket such as 28%, you will need to set aside even more money to pay all of the tax that is due.

You can fill out a W-4P form from the IRS to guide your employer about how much to withhold from your retirement plan withdrawals. This form will help you calculate your tax liability based on how much you expect to withdraw as well as your other income sources.

By filling out this form and adjusting the withholding to the more realistic amounts, you should be able to avoid under-withholding and the associated penalties that come with underpaying your taxes.


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