Introduction to tax withholding elections

Overview

Tax withholding elections (TWEs) offer individuals the ability to customize their tax withholding from retirement account distributions. This article explains how you can establish first-time TWEs, the ways you're permitted to amend existing TWEs, how 100% withholding requests are handled, and provides other general information.

If specific recommendations relating to a client's particular circumstances are required, contact an Internal Revenue Services (IRS) representative or a tax advisor.

For more information, see the FAQs relating to tax withholding elections.
 

  • TWEs are maintained at the account level.
    • All recurring profiles and standing authorizations have the same election.
    • Caution: Anytime you or your client changes the TWE, all recurring, future dated and standing authorizations will be updated with the newly selected TWE. If you wish to maintain the previous TWE election for the recurring, future dated and standing authorization, you must request an update to the TWE to align with the expected election amounts.
  • TWEs are listed as percentages.
    • Federal must be listed as a whole percentage.
    • State can include up to two decimals.
  • Account TWEs cannot exceed 99%.
    • 100% may not be set at the account level but can be disbursed (see 100% withholding section below).
    • TWE can be set below withholding minimums or opted out completely for federal and state.

A first-time TWE may be completed by:

Move Money
  • TWE can be established in Move Money without client authorization for accounts with WPFA authority.
    • User will also have to have “Update Move Money” functionality given by their FSA.
    • In the fixed header bar, click Edit under Tax withholding elections to submit elections.
    • This is an account level setting.
    • Special withholding requirements for certain states still apply (e.g., MI W4-P).
  • For accounts with LPFA or NDFA, the Edit feature will not display in the header bar. However, TWE can be established within a transaction. When you create a distribution request through Move Money or a digital workflow, your client authorizes the distribution, and their first-time tax withholding election if one is not already on file.
Schwab Alliance

Your client will:

  1. Log on to SchwabAlliance.com.
  2. Select, Move Money > Transfers & Payments.
  3. Select preferred distribution method:
    • Online Transfers
    • Request a check
    • Send a wire
  4. Complete the following pages:
    • Setup page: Select frequency, dollar amount, date, and any other distribution details. Select Continue.
    • Distributions and Tax Withholding page: Select distribution reason, gross or net, and tax withholding rate. Select Continue.
      • Current TWE automatically displays on this page.
      • If your client has not set the TWE, default Federal and minimum State tax rates display automatically.
      • Change Federal and/or State elections on this page.
  5. Submit page: Review the confirmation of the request, select I agree if transaction details displayed are accurate and your client agrees to listed terms. Select Submit. Once it's submitted, your client receives a confirmation page.
eAuthorizationWhen you establish a distribution request through Move Money or a digital workflow, your client authorizes the distribution, and their first-time tax withholding election if one is not already on file.   
Tax Withholding Election Form for Individual Retirement Accounts
  • A separate form is required for each account. 
  • This form may be used to establish a first-time tax withholding election or to change an existing tax withholding election.
  • This form may be completed using DocuSign® or wet signature.
IRA Distribution form
  • A separate form is required for each account. 
  • This form may be used to establish a first-time tax withholding election or change an existing tax withholding election with an accompanied distribution.
  • This form may be completed through DocuSign or with a wet signature.

 

Account holders may update their tax withholding elections any time using methods listed in the How to establish first-time tax withholding elections section.

Authorized agents at your firm may update a client's tax withholding election if your firm has one of the following:

  • Trading and Disbursement Authorization for Checks and Journals (WPFA).
  • Trading and Disbursement Authorization for Checks and Journals + Custody (WPFA+C).
  • Trading Authorization (LPFA) if a standing authorization is on file.
  • Non-Discretionary financial advisor (NDFA) Tooltip  if a standing authorization is on file.

Use the Move Money tab to update TWE. 

  • For accounts with WPFA, edit TWE by clicking on Edit in the fixed header bar on the Move Money tab. 
  • For accounts with LPFA or NDFA the Edit feature will not display in the header. However, for LPFA or NDFA accounts that have a standing authorization on file, you can edit TWE within the transaction workflow when you initiate a disbursement using the standing authorization. This will not require client authorization. 

As a result of IRS Form W-4R, clients may elect to withhold federal and state taxes at any rate between 0% and 100% percent, depending on the range permitted by the state in question. Note the following regarding 100% withholding: 

  • 100% withholding is only allowed for checks
  • The combined federal and state withholding totals cannot exceed 100%

You can only set a single transaction to 100% withholding—that setting is not applied at the account level going forward.
To set up a 100% tax withholding request in Move Money:

  1. Navigate to the Move Money tab. 
    • If your firm has access to both the current and legacy versions of Move Money, ensure you are in the current version. Note: 100% tax withholdings are not permitted in the legacy version.
  2. Search for the client's account. 
  3. Under Create transaction, select Check
  4. Under Use standing authorization? select No.
  5. Under Frequency, select One-time.
  6. Under Transaction details, select First party (account holder).
    • The payee name is prefilled.
  7. Select account holder address for the Delivery address.
  8. Select the process date.
  9. Select, Standard mail
    Note: No check will be mailed, and this will not be noted as a check disbursement in the transaction history. The requested amount will be processed in the same manner as all other tax withholding elections.
  10. Enter amount. 
  11. Enter tax withholding amounts totaling 100% in combined federal and state tax, or simply set the federal withholding to 100%.
  12. In dropdown under Distribution reason, select NORMAL(7)
    • Check reason and Memo are optional. 
  13. Click Continue
  14. Under Review, confirm the transaction details, check the Money Movement acknowledgement box, and click Submit
     

Do Roth IRA distributions default to zero, or should I establish a TWE for these accounts?
To make withdrawals from a Roth IRA account, you must have TWEs in place. This is true even if the Roth consists of after-tax funds, as your clients can still choose to withhold taxes on transactions in these accounts. The Move Money tool in Schwab Advisor Center® will prompt you to fill in the tax withholding election fields during the transaction setup flow, which can be set as low as 0.0% to meet your client's needs. For accounts with WPFA, you can also use the Edit feature in the fixed header bar to update or establish TWE. 

When my client converts shares from an IRA to a Roth IRA, are any taxes withheld by default?
Schwab will not withhold taxes for these conversions by default but will do so if your client requests. This requires available cash, and the withheld amounts will be included in the gross amount converted. The TWE amounts can be set in the internal transfer flow within the Move Money tool during transaction setup.

Once we submit a transaction with a different TWE than the IRA default, will that establish a default for the account? And will my client be required to authorize any future transactions with different TWE?
The TWE is established at the account level and stays at that level across transactions. For accounts with WPFA, you can amend the tax withholding rate by using the Edit feature in the fixed header bar on the Move Money tab. For LPFA and NDFA accounts, you can amend the tax withholding rate when processing a distribution in the Move Money tool. You can also use the IRA Distribution form or Tax Withholding Election form to update TWE without submitting a transaction. You'll find those in the Forms library on the Account Management page in Schwab Advisor Center.

What is the difference between using the Tax Withholding Election form and the IRA Distribution form to update TWE?

  • The IRA Distribution form lets you establish a one-time or standing authorization for distribution, and lets you set the TWE at the same time.
  • The Tax Withholding Election form updates the TWE on the account without the need to also generate a distribution.

How will the tax withholding affect scheduled QCDs?
TWEs at Schwab are set at the account level. If a QCD standing authorization is on file on your client's account, but the TWE on the account is set for a specific withholding rate, you should ensure that the distribution code for the standing authorization is QCD-7. This allows the transaction to be disbursed with 0% tax withholding without impacting the account level tax withholding election. If the standing authorization for the QCD is not established with QCD-7 as the distribution code, contact your service team.

We have clients with both recurring QCDs (which require 0.0% TWEs), and recurring distributions that require higher withholding monthly. How can we switch TWE instructions back and forth as needed?
Each time you wish to update these instructions for a QCD, use the Edit feature in the fixed header bar to update TWE. If unavailable, contact your service team. Otherwise, all recurring distributions will auto-process using the TWE established at the account level.

To select a form, go to the Forms library on Schwab Advisor Center. 

Resource: Tax withholding election (TWE) FAQs

How to request a retirement distribution