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: 1/1/2011The 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.
-
If you are eligible for a 401(k) plan you are considered covered,
even if you choose not to make contributions.
-
It does not matter if you have worked long enough to be vested
in employer contributions (you are always immediately vested in 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 "Retirement Plan" box should be checked if you were
covered in a plan sponsored by the employer.
Rev. date: 1/1/2011If 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.
Generally, 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 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.
Note: If you contributed after-tax dollars in the form of designated
Roth contributions to a 401(k) plan that permits such contributions, these
contributions would be fully taxable in the year of contributions, although
qualified distributions from the designated Roth account would not be taxed when
received.
Rev. date: 12/16/2010The rules for retirement plans are complex. Your plan administrator
should have written information about your particular plan that explains the
limitations imposed by law as well as other limitations that apply under the
plan:
-
The maximum amount an employee can contribute to a 401(k)
plan under the law is set each year.
-
If you are age 50 or older, you may be allowed to make additional
contributions (commonly referred to as catch-up contributions) in excess of the
normally applicable annual limit.
-
The maximum amount applies to an employee's aggregate pre-tax
contributions and designated Roth contributions to a 401(k) plan and 403(b)
plan.
-
There are several different limits that apply to a 401(k)
plan in addition to the overall contribution limit.
-
These other limits, your salary, the type of 401(k) plan
to which you are contributing, as well as the terms of the plan, may result in
the maximum amount that you can contribute to a 401(k) plan to be less than the
otherwise applicable legal limit.
Rev. date: 9/16/2010A lump-sum distribution is the distribution or payment, within
a single tax year, of an employee's entire balance from all of the employer's
qualified pension, profit-sharing, or stock bonus plans. If you were born on or
before January 1, 1936, or are the beneficiary of a participant born on or
before January 1, 1936, you may be able to able to elect optional methods
of figuring the tax on lump-sum distributions you received from an eligible
retirement plan. These optional methods can be elected only once after
1986.
For other situations and further information, see Publication
575,
Pension and Annuity Income.
Rev. date: 8/30/2010
-
Generally, the exception for using retirement funds in an
individual retirement plan to build or purchase your first home does not apply
to a distribution of your elective deferrals from a 401(k) plan.
-
Elective deferrals to a 401(k) plan are subject to certain
distribution restrictions. See
Publication 560 Retirement Plans for Small Business,
Publication 575 Pension and Annuity Income and
Tax Topic 424 401(k) plans.
-
If you are under the age of 59 1/2, a distribution (including
a distribution of employer matching and profit sharing contributions) from your
401(k) plan is generally subject to a 10% additional tax on early
distributions. There may be special rules, for example, if the
distribution is from a designated Roth account or after you reach age 55 and
separate from service. This 10% additional tax is in addition to other
taxes that apply to the distribution.
- Your plan administrator or employer should have written information
about your particular plan (including the availability of loans or hardship
distributions and applicable requirements) as well as other plan rules.
Rev. date: 8/30/2010
If the amount rolled over was the
net amount (the amount of the distribution less the tax withheld):
If the amount rolled over was the
gross amount (the amount rolled over included the 20% that was withheld):
-
You would not include the amount rolled over in gross taxable
income for the year.
-
In addition, you would not owe a 10% additional tax on early
distributions.
Rev. date: 3/22/2011
-
Generally, unless an exception applies, a distribution of
your benefits from a 401(k) plan before age 59 ½ is subject to the 10%
additional tax on early distributions from retirement plans. See
Publication 575,
Pension and Annuity Income.
-
However, there are special rules that apply to distributions that are made
before you reach age 55. For example, a distribution of your entire
benefit under from a 401(k) plan that is made after separation from service and
age 55 is not subject to the 10% tax.
Tax Topic 412 and
Tax Topic 558 are available for further guidance.
.
Rev. date: 8/31/2010If you default on a loan from your 401(k) plan:
For example, the 10% additional tax on early distributions does
not apply if all the following apply to you:
-
You received the distribution after you left your employer;
and
-
Your departure from the employer occurs during or after the
calendar year in which you reached age 55; and
-
Your departure from the employer qualifies as a separation
from service.
There are a number of exceptions to the 10% additional tax on
early distributions. You may wish to refer to Instructions for
Form 5329,
Additional Taxes on Qualified Plans (Including IRAs) and Other
Tax-Favored Accounts
Publication 575,
Pension and Annuity Income, and
Publication 560,
Retirement Plans for Small Business, for additional information.
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