The Internal Revenue Service issued final regulations on Oct. 21, 2024 regarding withholding on certain distributions to recipients outside the United States from retirement plans that aren’t eligible for rollover. The final regs clarify who’s considered a recipient outside the United States. They take effect on Jan. 1, 2026. However, taxpayers may apply it to distributions before that date.
A decedent’s estate and beneficiaries receive a new basis under Internal Revenue Code Section 1014(a) for most assets acquired from the decedent equal to the estate tax value. However, pursuant to IRC Section 1014(c), assets that are income in respect of a decedent (IRD) don’t get a new basis. IRAs are a common type of IRD. As a result, ignoring any basis from nondeductible contributions, IRA beneficiaries are taxed on any IRA benefits they receive.
Withholding Requirements
When optional. A U.S. person who receives payments from employer plans, IRAs and commercial annuities that aren’t eligible for rollover distributions may generally elect to waive withholding on distributions.
When required. A U.S. person may not waive withholding on distributions to be delivered outside the United States. That’s because many U.S. persons living outside the United States don’t file income tax returns.
Final Reg Provisions
The final regs provide:
An Army Post Office Fleet Post Office or Diplomatic Post Office address is treated as an address located in the United States.
Notice 87-7 required withholding on payments to recipients with a residence address outside the United States. The final regs expand this to require withholding payments to recipients who provide a residence address in the United States but direct that the funds be delivered outside the United States.
The final regs don’t apply to distributions to nonresident aliens that are subject to the withholding rules for nonresident aliens. These distributions are generally subject to withholding at 30%, except when a lower rate or exemption under a treaty applies.
