IRC 3405: Withholding on Periodic, Nonperiodic, and Rollover Payments

Under IRC Section 3405, the withholding rules for pensions and annuities set three different rates depending on how you take the money: periodic payments (like a monthly pension check) are withheld using the same wage tables employers use for paychecks, nonperiodic payments carry a 10% default rate, and eligible rollover distributions carry a mandatory 20% that you cannot waive.¹ You control the first two with a form. The third you can only avoid by moving the money directly from one plan to another.

Which Distributions Section 3405 Covers

The statute reaches any “designated distribution” from an employer deferred compensation plan (401(k), profit-sharing, defined benefit pension), an individual retirement plan (traditional and Roth IRAs), or a commercial annuity. Government 457(b) plans run by state or local employers are included too.¹

A few payments sit outside Section 3405. Amounts that count as wages run through regular payroll withholding instead. Payments to nonresident aliens fall under a separate 30% regime (or a lower treaty rate).² Any portion of a distribution the payer reasonably believes is nontaxable is excluded, which is why qualified Roth IRA distributions typically carry no withholding at all. Dividends on employer stock paid under Section 404(k) are also outside the rules.

One catch for traditional IRA owners: the statute treats the full distribution as includible in gross income for withholding purposes, even if part of it represents after-tax contributions. The basis recovery happens later on your return, not at the custodian.

Periodic Payments: Wage-Table Withholding

Periodic payments are distributions paid at regular intervals over more than a year. Monthly pension checks and scheduled annuity payments are the typical examples. The payer calculates withholding using the IRS percentage-method tables in Publication 15-T, the same tables employers use for payroll.³

You tell the payer how to run those tables by filing Form W-4P. It works much like the W-4 you filled out at a job: filing status, dependents, additional amounts if you want more withheld.⁴

If you never file one, the payer defaults to treating you as a single filer with no adjustments.⁵ For most retirees that produces more withholding than they actually need. Filing an accurate W-4P takes a few minutes and usually gets you closer to the right number. Your election stays in place until you submit a new form, and the payer must put a change into effect within a reasonable time of receiving it.

Nonperiodic Payments: The 10% Default

Nonperiodic payments cover anything that isn’t a regular installment stretched over more than a year: lump sums, partial withdrawals, on-demand IRA distributions, required minimum distributions, and similar one-off payouts. The default withholding rate is 10% of the gross distribution.¹

This default is not a mandate. You can elect out entirely, or you can ask for a higher rate, using Form W-4R. The form lets you pick any rate from 0% to 100%.⁶ If you don’t submit a W-4R, or if your Social Security number is missing or flagged by the IRS as incorrect, the payer must apply the 10% rate and cannot honor a verbal request for anything lower.

Keep this 10% withholding separate from the 10% additional tax on early distributions under IRC Section 72(t). Withholding is a prepayment of income tax, like paycheck withholding. The early distribution tax is a separate penalty that can apply if you take money out before age 59½ without an exception. One distribution can trigger both.

Eligible Rollover Distributions: Mandatory 20%

An eligible rollover distribution is any payment from a qualified plan that could be rolled over tax-free into another plan or IRA. If you take the cash yourself instead of sending it directly to another retirement account, the payer must withhold 20% of the gross amount. You cannot elect a lower rate, waive it, or negotiate around it.¹ You can only request more.

The one way around the 20% is a direct rollover under Section 401(a)(31)(A), where the funds move trustee-to-trustee and never reach you. Because the distribution never touches your hands, nothing gets withheld.

The 20% rule creates a trap for anyone trying a 60-day indirect rollover. If you take $100,000 in cash intending to roll it over, the payer sends you $80,000 and the IRS $20,000. To complete the rollover tax-free, you have to deposit the full $100,000 into a qualifying account within 60 days, which means finding $20,000 somewhere else to replace what was withheld.⁷ You get the $20,000 back as a credit when you file, but you need the cash now. People who can’t bridge the gap end up rolling over only $80,000 and owing tax (and potentially the 10% early distribution penalty) on the $20,000 shortfall.

W-4P or W-4R: Which Form Applies

The IRS uses two different forms, and sending the wrong one can delay your distribution or produce the wrong amount withheld.

Form W-4P applies to periodic payments only: monthly pensions, scheduled annuity installments, and similar recurring streams.⁴

Form W-4R handles everything else: nonperiodic payments and eligible rollover distributions.⁸ On a W-4R you can pick any rate from 0% to 100% for a non-eligible nonperiodic payment, but for an eligible rollover distribution you can only go up from 20%, never down.⁹

For nonperiodic distributions, the election generally applies one payment at a time. If you take several withdrawals from the same IRA in a year, you may need a new W-4R for each one, though IRS regulations let some payers apply a single election to all future nonperiodic distributions from the same arrangement. Ask your custodian or plan administrator which practice they follow.

Opting Out of Withholding

For periodic payments and non-eligible nonperiodic distributions, you can elect zero federal income tax withholding. On a W-4P, indicate no withholding. On a W-4R, select 0%.⁹

You cannot opt out of the 20% on eligible rollover distributions. No form, no letter, no phone call to the plan administrator changes that. The only workaround is the direct rollover.¹

What Opting Out Actually Costs

Zero withholding doesn’t reduce your tax. It just shifts when you pay. Federal income tax is a pay-as-you-go system, so skipping withholding means you need to send quarterly estimated payments on Form 1040-ES to keep up with your liability.

Underpay and the IRS charges a penalty. You generally avoid it by paying, through withholding and estimates combined, at least 90% of this year’s tax or 100% of last year’s.¹⁰ If your adjusted gross income exceeded $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110%.¹¹

Retirees taking a large distribution for the first time often underestimate the hit, especially when the payment pushes them into a higher bracket. A big unwithheld distribution can also drag more of your Social Security benefits into taxable territory, so the real cost of the withdrawal is often higher than the marginal rate alone suggests.

Inherited Account Distributions

When you inherit a retirement account, the same three categories apply, but which one you fall into depends on how you receive the money.

A surviving spouse who rolls an inherited account into their own IRA is treated as the new owner, and the normal rules apply from there.

Non-spouse beneficiaries have narrower choices. They generally cannot roll inherited plan funds into their own retirement accounts; the only move is a trustee-to-trustee transfer into an inherited IRA. A distribution paid directly to a non-spouse beneficiary from a qualified plan is typically an eligible rollover distribution subject to the mandatory 20%, unless the beneficiary elects a direct rollover to the inherited IRA. Once the money is in the inherited IRA, distributions from it are nonperiodic payments subject to the 10% default, which the beneficiary can change on Form W-4R.⁹

Beneficiaries operating under the SECURE Act’s 10-year rule should think about withholding across the full window rather than at the end of it. Pushing the bulk of the account into a single year concentrates the taxable income and often lands the beneficiary in a higher bracket than spreading withdrawals would have.

What You See After the Distribution

Any designated distribution of $10 or more shows up on Form 1099-R the following January. The form reports the gross distribution, the taxable amount, the federal tax withheld, and a code identifying what kind of payout it was.¹² The withheld amount flows onto your Form 1040 as a payment, exactly like withholding from a paycheck, and squares up against your total tax when you file.

1
Office of the Law Revision Counsel. 26 U.S. Code 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
2
Office of the Law Revision Counsel. 26 U.S. Code 1441 – Withholding of Tax on Nonresident Aliens
3
Internal Revenue Service. Publication 15-T (2026), Federal Income Tax Withholding Methods
4
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
5
Internal Revenue Service. Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
6
Internal Revenue Service. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
7
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
8
Internal Revenue Service. About Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
9
Internal Revenue Service. Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions
10
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
11
Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual To Pay Estimated Income Tax
12
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.