IRS finalizes tax withholding rule for pension payments outside US 

IRS has finalized a regulation clarifying the tax withholding rules for retirement plan payments to recipients located outside of the United States (US). Individuals residing in the US generally may elect no withholding under Internal Revenue Code Section 3405, but payments sent out of the country are subject to stricter rules. The regulation applies to payments made on or after Jan. 1, 2026, but taxpayers may apply it immediately. The final regulation, which is substantively the same as the 2019 proposal, provides the following:

• Withholding is required if the recipient provides a non-US residence address or fails to provide an address, even if the payment is sent to a financial institution or other individual located in the US.
• Withholding is required if the distribution is sent to a financial institution or other individual outside the US, even if the recipient has a US residence address.
• Military and diplomatic addresses are treated as within the US, so recipients at these addresses may elect no withholding.

These rules don’t apply to certain expatriates or recipients who are not US citizens or resident aliens. These recipients may elect no withholding even if the payments are sent outside of the US. Nonresident aliens are subject to separate withholding rules.

• Final regulation (Federal Register, Oct. 21, 2024)