When an individual receives eligible rollover funds from a profit-sharing plan, what is the income tax withholding requirement?

When an individual receives eligible rollover funds from a profit-sharing plan, the law requires a mandatory withholding for income taxes. Specifically, when funds are distributed from a qualified retirement plan, such as a profit-sharing plan, 20% of the distribution is withheld for federal income taxes if the funds are not directly rolled over into another qualified plan or an IRA.

This percentage applies to cash distributions and certain property distributions, ensuring that the government collects a portion of taxes owed on these deferred income amounts even before they are utilized by the individual. If the individual chooses to roll over the funds directly to another retirement account or plan, they can avoid this withholding altogether, as the funds are never technically "distributed" to them in that case.

The other options reflect incorrect withholding amounts for eligible rollover distributions. No withholding is not applicable since the law mandates a tax withholding for this type of distribution. Thus, the correct withholding rate is 20%, ensuring compliance with IRS regulations regarding retirement accounts.