The Internal Revenue Service issued final regulations on October 21, 2024 regarding the withholding of certain distributions to recipients outside the United States from retirement plans that do not qualify for rollback. The final rules clarify who is considered a recipient outside the United States. They take effect on January 1, 2026. However, taxpayers can apply it to distributions before that date.
The decedent's estate and beneficiaries receive a new basis under Section 1014(a) of the Internal Revenue Code for most assets purchased by the decedent equal to the estate tax value. However, under IRC Section 1014(c), assets that are income related to a decedent (IRD) do not receive a new basis. IRAs are a common type of IRD. As a result, ignoring any basis from non-deductible contributions, IRA beneficiaries are taxed on any IRA benefits they receive.
Withholding Requirements
When optional. A US person who receives payments from employer plans, IRAs and commercial annuities that are not eligible for rollover distributions can generally elect to waive withholding for distributions.
When required. A US person cannot waive withholding for distributions to be delivered outside the United States. This is because many US persons living outside the United States do not file income tax returns.
Provisions of the Final Regulation
The final rules provide:
An Army Post Fleet or Diplomatic Post Office address is treated as an address located in the United States.
Notice 87-7 required withholding of payments to recipients with a residential address outside the United States. The final rules expand this to require withholding of payments for recipients who provide a residential address in the United States but direct the funds to be delivered outside the United States.
The final rules do not apply to distributions to nonresident aliens that are subject to the withholding rules for nonresident aliens. These distributions are generally subject to 30% withholding unless a lower rate or treaty exemption applies.