Clear Money Guide
What this guide covers
A quick view of the questions and evidence developed below.
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Updated July 30, 2026. Quick answer: IRC §3405(c)(1)(B) requires the payor of an eligible rollover distribution to “withhold from such distribution an amount equal to 20 percent of such distribution.” It is withholding, not tax — a prepayment you reconcile on your return. And §3405(c)(2) switches it off entirely if you elect under §401(a)(31)(A) to have the payment made directly to an eligible retirement plan. One box, correctly ticked, is the whole difference.
More on the IRS segment rates: the December 2025 segment rates, the February 2026 segment rates, the April 2026 segment rates and the August 2026 segment rates.
Related reading on this site: IRS Tax Topic 410, IRS Tax Topic 412 and IRS Tax Topic 413.
California Form 540, line by line: California Form 540 line 34.
More on public pension systems, topic by topic: Arkansas LOPFI DROP and Kansas KPERS partial lump-sum option.
IRS worksheets read line by line: W-4P Deductions Worksheet.
Related reading on this site: IRS Publication 575.
Retirement forms read line by line: Form 4972 Part I, Form W-4R lines 1a and 1b and Form W-4R line 2.
Read box by box from the IRS form text: Form 1099-R box 3, Form 1099-R box 4 and Form 1099-R box 6.
More IRS forms and schedules, read line by line: Form 1040-ES instructions and Form 1040-SR instructions.
State by state, whether the state withholds tax on retirement withdrawals: state withholding on retirement withdrawals.
Put a withdrawal through the 2026 brackets: 401(k) withdrawal calculator.
Put your own numbers through the CalPERS formula: CalPERS retirement calculator.
More public-system examples of the withholding rule: Mississippi PERS retirement decisions, Wyoming Retirement System decisions and Nebraska NPERS retirement decisions.
More public-system examples of the withholding rule: SERS of Ohio retirement decisions and NHRS retirement decisions.
More public-system examples of the withholding rule: ERS Georgia retirement decisions, Arkansas ATRS retirement decisions and SURS retirement decisions.
Public-system examples of the withholding rule: KPERS retirement decisions, Utah Retirement Systems retirement decisions and UCRP retirement decisions.
Public-system examples of the withholding rule: TCDRS retirement decisions, ERS of Texas retirement decisions, Pennsylvania SERS retirement decisions and LACERA retirement decisions.
Public-system examples of the withholding rule: IMRF retirement decisions, ASRS retirement decisions and TMRS retirement decisions.
Related guides on this topic: Your Plan May Be Barred From Paying You a Lump Sum, Does North Dakota Tax Pensions? and Does Vermont Tax Pensions?.
The rule and its exception, side by side
§3405(c)(1): “In the case of any designated distribution which is an eligible rollover distribution— (A) subsections (a) and (b) shall not apply, and (B) the payor of such distribution shall withhold from such distribution an amount equal to 20 percent of such distribution.”
§3405(c)(2): “Paragraph (1)(B) shall not apply to any distribution if the distributee elects under section 401(a)(31)(A) to have such distribution paid directly to an eligible retirement plan.”
Note what (c)(1)(A) does: it displaces the ordinary withholding rules, including the 10 percent that §3405(b) applies to a nonperiodic distribution. This is a different, higher, mandatory rate that exists specifically for rollable money.
Coordinate this with the rest of your retirement plan
A pension election is usually a one-time choice you cannot revisit, and an adviser can weigh it against your other income, your spouse’s position and how long the money has to last, though that does not replace the numbers in your own plan documents.
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The trap, which is a cash-flow trap rather than a tax one
The exception in (c)(2) is a direct payment to an eligible retirement plan. It is not the 60-day rollover. If the cheque comes to you and you deposit it into an IRA within 60 days, the withholding still happened — and to roll over the whole distribution you must make up the withheld portion out of your own money, then wait to recover it when you file.
| How the payment is made | Withheld under §3405(c) | What you must do to have rolled the whole amount |
|---|---|---|
| Directly to an eligible retirement plan under §401(a)(31)(A) | Nothing — (c)(2) applies | Nothing further |
| To you, then deposited within 60 days | 20 percent | Replace the withheld portion from other funds, and recover it on your return |
| To you, and kept | 20 percent | Not a rollover. The distribution is income, and the §72(t) question arises |
Why the withheld amount is not your tax bill. Twenty percent is a fixed statutory rate applied without reference to your bracket, your deductions or your other income. On a large distribution it can be well short of what is owed, and on a smaller one it can be more. Treating the withheld figure as “the tax” is how people end up surprised in April in both directions. The number that matters is what the distribution does to your total taxable income for the year.
One boundary worth stating, because it decides whether this page applies to you at all: §3405(c) only reaches an eligible rollover distribution, and a monthly pension is excluded from that definition by §402(c)(4)(A). So this 20 percent question exists only on the lump-sum side of the election. Choose the annuity and it never arises.
Withholding is the visible surprise; the election behind it is the expensive one — what to ask before you elect.
Sources
IRC §3405(c)(1), §3405(c)(2) and §3405(c)(3), quoted verbatim; IRC §3405(b) for the nonperiodic rate it displaces; IRC §401(a)(31)(A) for the direct-payment election. Retrieved from the United States Code, July 2026.
This states what the cited authority says. It is not tax, legal or investment advice. A pension election turns on your own plan document, your own health and marital situation, and figures your plan must give you in writing — and this site states no conversion factor and no break-even age, because both are specific to your plan and a borrowed number is worse than none. The monthly IRS segment rates are public and are on their own page.
Related
Guides › Pension and Annuity Decisions
Nobody withholds for you in retirement. Work out your safe-harbour number — 90% of this year or 100% of last year, whichever is lower — and if the year is already off track, withholding from a December RMD counts as paid evenly across all four quarters, which an estimated payment does not.