Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.) > General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans

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Frequently Asked Tax Questions

Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.) - General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans

Rev. date: 1/2009

Am I considered covered by an employer sponsored retirement plan for the year if I do not participate in the plan or if I did not work long enough to be vested?

Contributions (IRAs & Pension Plans)
Covered by an employer retirement plan.
Individual Retirement Arrangement
Nondeductible Contributions (IRA)
Plan
Profit Sharing Plan
Qualified Plan
Retirement Plan
Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
Tax Sheltered Annuity
Traditional IRA

The answer to this question depends on the type of retirement plan.

Generally, if your employer's plan has a separate account for each employee, it is a defined contribution plan.

If any amount was contributed or allocated by you or your employer to your account, you are considered covered.
It does not matter if you have worked long enough to be vested in your benefits (other than your own contributions).

In the other type of plan, a defined benefit plan:

The employer must make enough contributions (together with earnings) to provide the retirement benefit promised in the retirement plan.
If you meet the minimum age and years of service requirements to participate in your employer's plan, you are considered covered.
It does not matter if you are not vested in your benefits.

The Form W-2 (PDF) you receive from your employer has a box used to indicate whether you were covered for the year. The "Pension Plan" box should be checked if you were covered in a plan sponsored by the employer.

Rev. date: 1/2009

This is the first year that I received a distribution of benefits from my 401(k) plan. Are any of my benefits taxable?

1099-R
Distributions, Minimum required
Pension and Annuity Income
Plan
Profit Sharing Plan
Qualified Plan
Qualified Withdrawals
Retirement Plan

If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable in the year received.

Your pension or annuity is usually fully taxable:

If your employer contributed all of the cost without including the cost in your taxable wages, or
If you got back all of your previously taxed contributions tax free in previous years.

Generally, your pension or annuity will be partially taxable:

If you contributed after-tax dollars.
You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid.

If you receive pension or annuity payments before age 59-1/2, you may be subject to an additional 10% tax on early distributions. See Publication 575.


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