With many of your members getting ready to take out their 2013 required minimum distributions (RMDs), now is the perfect time to brush up on the Individual Retirement Account (IRA) withholding notice and election requirements for credit unions. Read more at: www.nafcu.org/

1. The Federal Credit Union May–JUNE 201354
inside nafcu
services
IRAWithholdingNoticeand
ElectionRequirements
By Jennifer Bassett
W
ith many of your mem-
bers getting ready to take
out their 2013 required
minimum distributions
(RMDs), now is the perfect time to brush
up on the Individual Retirement Account
(IRA) withholding notice and election
requirements for credit unions.
Withholding is an important compliance
issue for IRAs. Like withholding from
a paycheck, IRA distribution withhold-
ing prepays income taxes. Taxes with-
held from IRA distributions are credited
against an individual’s total tax liability
for the year. So not only is withholding
required by law, it’s a valuable customer
service that you provide your members.
Notice Requirement
For annual IRA distributions of $200 or
more, your credit union must provide a
withholding notice. This notice allows
the member (i.e., the IRA owner or
beneficiary) to choose exactly how much
or what percentage they want withheld
— including not having any withhold-
ing at all. Even if members choose not to
withhold taxes from their distributions,
they are still responsible for paying taxes
on the distribution. The notice also lets
them know they have the right to change
their mind about how much they want
withheld. If your credit union fails to give
members a withholding notice, the IRS
could assess a $10 penalty for each failure.
Frequency
If distributions are taken less frequently
than quarterly, you must provide a with-
holding notice before each distribution,
but no more than six months before each
distribution. If distributions are taken
quarterly or more frequently, you must
provide the withholding notice once per
year at a reasonable time before the first
payment each year.
Format
To comply with the withholding notice
requirements, credit unions must provide
members with an IRS Form W-4P, With-
holding Certificate for Pension or Annuity
Payments, or a substitute form. If your
credit union offers a substitute form,
the form must follow certain required
guidelines or be submitted to the IRS for
approval. These guidelines are outlined in
IRS News Release IR-83-3.
To prove that the form has been sent to the
member on a timely basis, you should date
the form before mailing and retain a copy
in the member’s file. You should send two
copies to the member: one to keep and,
if a change is desired, one to return with
signature to your credit union.
Election
Members may elect to withhold 10
percent or more on IRA distributions.
Members also may elect to waive with-
holding. The election is authorized when
the member signs IRS Form W-4P (or
a substitute form). Once your member
makes a withholding election, it is valid
until revoked. You should retain a copy
of the election in the member’s file. If the
member does not elect out of withhold-
ing, you must withhold 10 percent of the
IRA distribution. A member may revoke
an election at any time by signing another
Form W-4P.
Many credit unions integrate the with-
holding election into the withdrawal
statement so that Form W-4P is available
for each distribution. But when a mem-
ber has established a series of scheduled
payments, you may send a Form W-4P
to the member according to the notice
frequency stated previously.
Summary
Compliance with the IRS withholding
notice provisions is all in the timing and
retention. This may be the best time to
get withholding notices out to all of your
members who are scheduled for RMDs in
2013. It is also the right time to plan any
other withholding notices that are needed
to meet the IRA requirements.
Jennifer Bassett is a writer/editor at Ascen-
sus. She specializes in traditional and Roth
IRAs, health savings accounts, Coverdell
education savings accounts and various
employer-sponsored retirement plans.
She also answers client inquires through
Ascensus’ 800 Consulting service.
Compliance with the IRS withholding
notice provisions is all in the timing
and retention.