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IRS.gov Website

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

  1. 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?
  2. This is the first year that I received a distribution of benefits from my retirement plan. Are any of my benefits taxable?
  3. What is the maximum amount that I can contribute to my 401(k) plan?
  4. I received a lump-sum distribution when I retired. Is there any special tax averaging option on a lump-sum distribution?
  5. If taxes are withheld from a distribution from a 401(k) plan, am I required to include the amount of the distribution as income and also pay the 10% additional tax?
  6. Can I withdraw my elective deferrals to a 401(k) plan to build or purchase my first home without paying the 10% additional tax on early distributions?
  7. I changed jobs and received a distribution (via check) of my entire vested account under my former employer's 401(k) plan. The plan withheld 20% of my account for Federal Income Taxes. Within 60 days of receiving the distribution, I rolled over the distribution to my current employer's 401(k) plan. Since taxes were withheld from the distribution made by my former employer's plan, do I have to include that money as income?
  8. If I retire or leave my employer for any reason (including due to being laid off) before I am age 59 1/2, can I withdraw my vested benefits under that employer's 401(k) plan, without having to pay a 10% additional tax? What if I were 55 or older when I separated from service with my employer?
  9. My understanding is that the 10% additional tax on early distributions is forgiven if I am over age 55 and default on a loan through my 401(k) plan when I have a separation from service with my employer. Can you confirm that for me?

Rev. date: 1/1/2011

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?

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.
In the other type of plan, a defined benefit plan:
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: 1/1/2011

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

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.
Generally, your pension or annuity is usually fully taxable:
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: 12/16/2010

What is the maximum amount that I can contribute to my 401(k) plan?

The 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:

Rev. date: 9/16/2010

I received a lump-sum distribution when I retired. Is there any special tax averaging option on a lump-sum distribution?

A 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: 3/15/2011

If taxes are withheld from a distribution from a 401(k) plan, am I required to include the amount of the distribution as income and also pay the 10% additional tax?

 

Rev. date: 8/30/2010

Can I withdraw my elective deferrals to a 401(k) plan to build or purchase my first home without paying the 10% additional tax on early distributions?


Rev. date: 8/30/2010

I changed jobs and received a distribution (via check) of my entire vested account under my former employer's 401(k) plan. The plan withheld 20% of my account for Federal Income Taxes. Within 60 days of receiving the distribution, I rolled over the distribution to my current employer's 401(k) plan. Since taxes were withheld from the distribution made by my former employer's plan, do I have to include that money as income?

 
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):

Rev. date: 3/22/2011

If I retire or leave my employer for any reason (including due to being laid off) before I am age 59 1/2, can I withdraw my vested benefits under that employer's 401(k) plan, without having to pay a 10% additional tax? What if I were 55 or older when I separated from service with my employer?

.

Rev. date: 8/31/2010

My understanding is that the 10% additional tax on early distributions is forgiven if I am over age 55 and default on a loan through my 401(k) plan when I have a separation from service with my employer. Can you confirm that for me?

If 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:
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.