Because they don't trust United States persons resident abroad and green card holders to pay their taxes, the IRS has issued final regulations on required income tax withholding for certain types of retirement distributions. These regulations apply to distributions from deferred compensation plans (such as 401(k)s), IRAs, and commercial annuities.
Under the final regulations, mandatory income tax withholding requirements for periodic distributions (§3405(a)) or non-periodic distributions (§3405(b)) depend on the payee’s residence address given to the payor.
The regulations are effective Oct. 21, 2024 and apply to payments made on or after Jan. 1, 2026. Of course, you may apply them to earlier payments and distributions if you want. Here is the breakdown:
- Mandatory withholding is required if the payee provides a residence address located outside of the U.S., even if the payee requests delivery to a U.S. bank or other location within the U.S. You may not request exemption from withholding in these circumstances.
- Likewise, if you do not provide any residence address to the payor, mandatory withholding is required even if delivery is requested to a U.S. person, such as a trustee. You may not elect exemption from withholding.
- Mandatory withholding applies if the payee’s residence address is located within the U.S. However, in this case you can make a valid election of no withholding. The election can be invalidated in certain instances, such as if you request to deliver the payment to a location outside of the U.S.
- An Army Post Office (APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) is treated like a U.S. address no matter where it is located.
- Different withholding rules apply to U.S. source payments made to nonresidents. See IRS Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities for more information on that.