70 1/2 participant has requested full distribution, but has also requested that we not withhold 20%. He claims that his income is not enough to file tax return (even including distribution). Can we do that or is there a possibility that we could be liable for the taxes on that distribution? Is this between the taxpayer and the IRS, or are we required to withhold?

Paying the tax is between the IRS and the taxpayer. Doing the required withholding is between the IRS and the payor.

Assuming you are talking about a lump sum distribution, yes you have to withhold. But no withholding is required if the employee elects a direct rollover to an IRA.

The simple solution is to have the participant elect a direct rollover (to avoid the withholding). Because the withholding upon distributions from an IRA are voluntary, the person can get around the withholding rules this way.

I agree with Kirk. However, It sounds to me like he needs the money if he's worried about the 20% witholding if he rolls it into an IRA and needs the money he may have early withrawal penalties from taking a distribution.

Thanks - you guys ROCK!

KIP KRAUS:

Why would the early withdrawal penalty apply if the participant is already over 70-1/2?

Because the investment firm to which he rolls it over to could charge him an early withdrawal fee. I don't think that has anything to do with the 70 1/2 rule. It just has to do with investment compnay policy.