No. The plan trustee should only withhold 20% for federal income tax from eligible rollover distributions.
If the distribution is less than $200 for the year, the plan trustee is not required to apply withholding.
The 20% withholding usually only applies to any previously untaxed amount of the eligible rollover distribution (not to any already taxed amount – cost).
However, no withholding is required if the plan directly rolls over (in a trustee-to-trustee transfer) the amount to another qualified retirement plan or IRA. For example, a former employer 401k or pension plan may be directly rolled over to a solo 401k; therefore, the 20% withholding would not apply.
Distributions from designate Roth accounts in 401(k), 403(b), 457(b) or TSP
Qualified distribution – no withholding because the distribution is not taxable.
Non-qualified distribution – withholding required only from any distributed earnings that the recipient must include in gross income.
Required Minimum Distributions
The 20% mandatory federal tax does not apply to required minimum distributions (RMDs) because RMDs are not considered eligible rollover distributions.
Penalties
A plan trustee may be subject to penalties for failing to:
Properly withhold, deposit or report taxes; and
Electronically deposit withheld taxes. (see for example, Code 6656 and 6672, 6721, 6722 and Treas. Reg 31.6302-1(h))
Additional Resources
Publication 15-A, Employer’s Supplemental Tax Guide
Publication 505, Tax Withholding and Estimated Tax
Publication 575, Pension and Annuity Income
