New Withholding Requirements for Qualified Plan Distributions to D.C. Residents

Qualified retirement plans (and 403(b) plans) with participants who live in the District of Columbia are subject to new tax withholding rates.  Under a new D.C. law, plans making distributions after January 1, 2012 to D.C. residents must withhold local taxes at the highest D.C. income tax rate—currently 8.95%. 

While the new legislation is technically effective January 1, 2012, D.C.’s Office of Tax and Revenue acknowledged that the change was made upon short notice - the guidance was issued on December 28, 2011 - and indicated that plans were expected to make the change effective “as soon as possible.”

The new withholding rule applies to any qualified retirement plan (including 401(k) plans, pension plans, etc.) or 403(b) tax-sheltered annuity plan, as well as to IRAs.