Need Help with W/H Exemption for 457 Lump Sum Distribution

[Bonny]

Hi all,

I'm running into a frustrating situation.

I'm in the process of taking my first lump sum distribution of my 457 plan ($20k or about 16% of my total balance). When I called the company (National Deferred) I told them I didn't want any taxes withheld because we were having a very low income year and we already had money on deposit with the IRS (we kept our 2014 refund to pay 2015 ES). The guy I spoke to said to fill out a W-4P and put 99+ exemptions for the Feds and told me to go to CA Franchise Tax Board website and fill out a DE-4P. When I went to the Franchise Board website there is no DE-4P. The closest I could find was a 590 Withholding Exemption Certificate.

I called National Deferred today to try to confirm that the 590 was the correct form they needed and the person with whom I spoke said that the IRS requires a mandatory 20% w/h for all lump sum distributions. She even checked with her manager.

It doesn't make sense to me. I went through something similar earlier this year when my father got a lump sum distribution from a prior employer (about 15 years of $100.00 payments) and I was able to opt for no withholding.

Is National Deferred correct? Is there something special for 457s vs pensions?

As always, thanks for your help!

[taxref]

I do not practice in CA, but upon a quick reading of the federal regulations the company *seems* to be incorrect.  The 20% withholding is mandatory for non-direct rollovers, but is optional for distributions.  


The reason I said "seems" is because the regs seem to differentiate between different forms of 457 plans.  I would recommend that you read some of the regulations, which are here: www.irs.gov/pub/irs-drop/n-03-20.pdf    After you read those, you can repost with details about your own plan.  That should enable someone to give a more accurate answer.     

[Bonny]

Oct 23, 2015 20:21:06 GMT -5 taxref said:

I do not practice in CA, but upon a quick reading of the federal regulations the company *seems* to be incorrect.  The 20% withholding is mandatory for non-direct rollovers, but is optional for distributions.  


The reason I said "seems" is because the regs seem to differentiate between different forms of 457 plans.  I would recommend that you read some of the regulations, which are here: www.irs.gov/pub/irs-drop/n-03-20.pdf    After you read those, you can repost with details about your own plan.  That should enable someone to give a more accurate answer.     

Hi Tax Ref and thanks for your response. My 457 is from a local governmental agency.

Therefore if I'm reading it correctly, my situation falls under IV Tax Withholding...on Governmental 457(b) Plan Distributions; paragraph 3 "the recipient may elect not to have withholding apply under SS 3405(a)...

correct?

[taxref]

I agree with you, as per the bottom of Page 4 and the top of Page 5 of the material.