Prior to the Tax Cuts and Jobs Act, those receiving periodic payments from pensions, annuities and certain other deferred income had withholding computed by default at the rate imposed on a married wage earner claiming 3 exemptions. As the Tax Cuts and Jobs Act revisions eliminated the prior method of wage withholding, IRC §3405(a) was modified to change this default withholding, providing for methods to be determined by the IRS.

The IRS has now issued final regulations[1] to provide for withholding on such retirement distributions. The regulations apply to payments made after December 31, 2020. For 2020 payments, the IRS had issued guidance found in Notice 2020-03, issued in December 2019.

The IRS adds new Reg. §31.3405-1, Questions and answers relating to Federal income tax withholding on periodic retirement and annuity payments, to outline the new withholding provisions on such payments. The regulation is written in question and answer format, with two provisions with detailed rules and a final question to outline the effective date.

With the changes made to the Form W-4 for 2020, the IRS has issued Notice 2020-03[1] to give instructions on how to deal with withholding on periodic payments for pensions, annuities and certain other deferred income under IRC §3405(a).