What percentage of a benefits payment eligible for rollover must a trustee withhold for federal tax?

What percentage of a benefits payment eligible for rollover must a trustee withhold for federal tax?

• A. 5%
• B. 10%
• C. 15%
• D. 20%

Answer: (D)

The correct answer is 20%. When a participant in a qualified retirement plan, such as a 401(k), takes a distribution that is eligible for rollover, the Internal Revenue Service (IRS) mandates that the trustee must withhold 20% of the taxable portion of the distribution for federal taxes if the payment is not rolled over directly into another qualified plan. This requirement is designed to ensure that taxes are collected on distributions that individuals may not roll over. This withholding applies specifically to distributions that are eligible to be rolled over, which includes most distributions from retirement plans but excludes certain types of payments or accounts. Therefore, if an eligible distribution is taken in cash or as a check and the participant chooses not to roll it over, the trustee is required to withhold 20% for federal tax purposes, effectively ensuring that the individual doesn't completely avoid taxation on that amount. Understanding this rule is crucial for individuals managing their retirement distributions, as it impacts the amount they will receive in hand and the tax implications of cashing out or rolling over retirement funds.

The correct answer is 20%. When a participant in a qualified retirement plan, such as a 401(k), takes a distribution that is eligible for rollover, the Internal Revenue Service (IRS) mandates that the trustee must withhold 20% of the taxable portion of the distribution for federal taxes if the payment is not rolled over directly into another qualified plan. This requirement is designed to ensure that taxes are collected on distributions that individuals may not roll over.

This withholding applies specifically to distributions that are eligible to be rolled over, which includes most distributions from retirement plans but excludes certain types of payments or accounts. Therefore, if an eligible distribution is taken in cash or as a check and the participant chooses not to roll it over, the trustee is required to withhold 20% for federal tax purposes, effectively ensuring that the individual doesn't completely avoid taxation on that amount.

Understanding this rule is crucial for individuals managing their retirement distributions, as it impacts the amount they will receive in hand and the tax implications of cashing out or rolling over retirement funds.