Which type of retirement plan distribution may be subject to mandatory 20% withholding?

The type of retirement plan distribution that may be subject to mandatory 20% withholding is the indirect rollover. When an individual takes a distribution from a qualified retirement account (like a 401(k) or an IRA) and chooses to receive the funds directly rather than rolling them over into another retirement account immediately, they are required to have 20% of the distribution withheld for federal taxes. This is done to ensure that the IRS receives tax revenue up front, as there might be a risk that the individual does not complete the rollover within the required 60 days.

If the distribution is subsequently rolled over into another qualified retirement plan, the individual may be credited for the 20% that was withheld when they file their tax return, but the mandatory withholding can create a significant cash flow issue if the withheld amount is not factored into the rollover amount.

In contrast, direct rollovers do not involve withholding, as the funds are transferred directly between retirement accounts. Hardship withdrawals may have different tax implications and penalties but typically are not subject to the mandatory withholding rule. Loan repayments do not constitute a distribution in the same sense and therefore do not trigger withholding requirements.