Publication 575
taxmap/pubs/p575-003.htm#en_us_publink1000226809This section of the publication explains how any nonperiodic
distributions you receive under a pension or annuity plan are taxed. Nonperiodic
distributions are also known as amounts not received as an annuity. They include
all payments other than periodic payments and corrective distributions.
For example, the following items are treated as nonperiodic distributions.
- Cash withdrawals.
- Distributions of current earnings (dividends) on your investment.
However, do not include these distributions in your income to the extent the
insurer keeps them to pay premiums or other consideration for the contract.
- Certain loans. See
Loans Treated as Distributions, later.
- The value of annuity contracts transferred without full and
adequate consideration. See
Transfers of Annuity Contracts, later.
Generally, if the contributions made for you during the year
to certain retirement plans exceed certain limits, the excess is taxable to you.
To correct an excess, your plan may distribute it to you (along with any income
earned on the excess). Although the plan reports the corrective distributions on
Form 1099-R, the distribution is not treated as a nonperiodic distribution from
the plan. It is not subject to the allocation rules explained in the following
discussion, it cannot be rolled over into another plan, and it is not subject to
the additional tax on early distributions.
 |
If your retirement plan made a corrective distribution of excess amounts (excess
deferrals, excess contributions, or excess annual additions), your Form 1099-R,
should have the code "8," "B," "D," "P," or "E" in box 7.
|
For information on plan contribution limits and how to report
corrective distributions of excess contributions, see
Retirement Plan Contributions under
Employee Compensation in Publication 525.
taxmap/pubs/p575-003.htm#en_us_publink1000226814How you figure the taxable amount of a nonperiodic distribution
depends on whether it is made before the annuity starting date or on or after
the annuity starting date. If it is made before the annuity starting date, its
tax treatment also depends on whether it is made under a qualified or
nonqualified plan and, if it is made under a nonqualified plan, whether it fully
discharges the contract, is received under certain life insurance or endowment
contracts, or is allocable to an investment you made before August 14, 1982.
| You may be able to roll over the taxable amount of a nonperiodic
distribution from a qualified retirement plan into another qualified retirement
plan or a traditional IRA tax free. See
Rollovers, later. If you do not make a tax-free rollover and the
distribution qualifies as a lump-sum distribution, you may be able to elect an
optional method of figuring the tax on the taxable amount. See
Lump-Sum Distributions, later.
|
taxmap/pubs/p575-003.htm#en_us_publink1000226818The annuity starting date is either the first day of the first
period for which you receive an annuity payment under the contract or the date
on which the obligation under the contract becomes fixed, whichever is later.
taxmap/pubs/p575-003.htm#en_us_publink1000226819
If you receive a distribution of employer securities from a qualified retirement
plan, you may be able to defer the tax on the net unrealized appreciation (NUA)
in the securities. The NUA is the net increase in the securities' value while
they were in the trust. This tax deferral applies to distributions of the
employer corporation's stocks, bonds, registered debentures, and debentures with
interest coupons attached.
If the distribution is a lump-sum distribution, tax is deferred
on all of the NUA unless you choose to include it in your income for the year of
the distribution.
A lump-sum distribution for this purpose is the distribution or payment of a
plan participant's entire balance (within a single tax year) from all of the
employer's qualified plans of one kind (pension, profit-sharing, or stock bonus
plans), but only if paid:
- Because of the plan participant's death,
- After the participant reaches age 591/2,
- Because the participant, if an employee, separates from service,
or
- After the participant, if a self-employed individual, becomes
totally and permanently disabled.
| If you choose to include NUA in your income for the year
of the distribution and the participant was born before January 2, 1936, you may
be able to figure the tax on the NUA using the optional methods described under
Lump-Sum Distributions, later. |
If the distribution is not a lump-sum distribution, tax is deferred
only on the NUA resulting from employee contributions other than deductible
voluntary employee contributions.
The NUA on which tax is deferred should be shown in box 6 of
the Form 1099-R you receive from the payer of the distribution.
When you sell or exchange employer securities with tax-deferred
NUA, any gain is long-term capital gain up to the amount of the NUA that is not
included in your basis in the employer securities. Any gain that is more than
the NUA is long-term or short-term gain, depending on how long you held the
securities after the distribution.
Your basis in the employer securities is the total of the following
amounts.
- Your contributions to the plan that are attributable to the
securities.
- Your employer's contributions that were taxed as ordinary
income in the year the securities were distributed.
- Your NUA in the securities that is attributable to employer
contributions and taxed as ordinary income in the year the securities were
distributed.
Enter the total amount of a nonperiodic distribution on Form
1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Enter the
taxable amount of the distribution on Form 1040, line 16b; Form 1040A, line 12b;
or Form 1040NR, line 17b. However, if you make a tax-free rollover or elect an
optional method of figuring the tax on a lump-sum distribution, see
How to report in the discussions of those tax treatments, later.
taxmap/pubs/p575-003.htm#en_us_publink1000226823If you receive a nonperiodic payment from your annuity contract
on or after the annuity starting date, you generally must include all of the
payment in gross income. For example, a cost-of-living increase in your pension
after the annuity starting date is an amount not received as an annuity and, as
such, is fully taxable.
taxmap/pubs/p575-003.htm#en_us_publink1000226824If the annuity payments you receive are reduced because you received
a nonperiodic distribution, you can exclude part of the nonperiodic distribution
from gross income. The part you can exclude is equal to your cost in the
contract reduced by any tax-free amounts you previously received under the
contract, multiplied by a fraction. The numerator is the reduction in each
annuity payment because of the nonperiodic distribution. The denominator is the
full unreduced amount of each annuity payment originally provided for.
taxmap/pubs/p575-003.htm#en_us_publink1000226825If you receive a single-sum payment on or after your annuity
starting date in connection with the start of annuity payments for which you
must use the Simplified Method, treat the single-sum payment as if it were
received before your annuity starting date. (See
Simplified Method under
Taxation of Periodic Payments,
earlier, for information on its required use.) Follow the rules discussed under
Distribution Before Annuity Starting Date From a Qualified Plan, later.
You may receive an amount on or after the annuity starting date
that fully satisfies the payer's obligation under the contract. The amount may
be a refund of what you paid for the contract or for the complete surrender,
redemption, or maturity of the contract. Include the amount in gross income only
to the extent that it exceeds the remaining cost of the contract.
taxmap/pubs/p575-003.htm#en_us_publink1000226828If you receive a nonperiodic distribution before the annuity
starting date from a qualified retirement plan, you generally can allocate only
part of it to the cost of the contract. You exclude from your gross income the
part that you allocate to the cost. You include the remainder in your gross
income.
For this purpose, a qualified retirement plan is:
- A qualified employee plan (or annuity contract purchased by
such a plan),
- A qualified employee annuity plan, or
- A tax-sheltered annuity plan (403(b) plan).
Use the following formula to figure the tax-free amount of the
distribution.
| | | | | | |
| | Amount received | x | Cost of contract | = | Tax-free amount |
| | Account balance |
For this purpose, your account balance includes only amounts
to which you have a nonforfeitable right (a right that cannot be taken away).
taxmap/pubs/p575-003.htm#en_us_publink1000226830Ann Brown received a $50,000 distribution from her retirement
plan before her annuity starting date. She had $10,000 invested (cost) in the
plan. Her account balance was $100,000. She can exclude $5,000 of the $50,000
distribution, figured as follows:
| | | | | | |
| | $50,000 | x | $10,000 | = | $5,000 |
| | $100,000 |
A defined contribution plan is a plan in which you have an individual
account. Your benefits are based only on the amount contributed to the account
and the income, expenses, etc., allocated to the account. Under a defined
contribution plan, your contributions and income allocable to them (and not
including employer contributions and income allocable to them) may be treated as
a separate contract for figuring the taxable part of any distribution
taxmap/pubs/p575-003.htm#en_us_publink1000226833Ryan participates in a defined contribution plan that treats
employee contributions and earnings allocable to them as a separate contract. He
received a non-annuity distribution of $5,000 before his annuity starting date.
He had made after-tax contributions of $10,000. The earnings allocable to his
contributions were $2,500. His employer also contributed $10,000. The earnings
allocable to the employer contributions were $2,500.
To determine the tax-free amount of Ryan's distribution use the
same formula shown above. However, because employee contributions are treated as
a separate contract the account balance would be the total of Ryan's
contributions and allocable earnings.
Thus the tax-free amount would be $5,000 × ($10,000 ÷
$12,500) = $4,000. The taxable amount would be $1,000 ($5,000 − $4,000).
If the employee contributions were not treated as a separate
contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷
$25,000)) and the taxable amount would be $3,000 ($5,000 − $2,000).
taxmap/pubs/p575-003.htm#en_us_publink1000226834If you contributed before 1987 to a pension plan that, as of
May 5, 1986, permitted you to withdraw your contributions before your separation
from service, any distribution before your annuity starting date is tax free to
the extent that it, when added to earlier distributions received after 1986,
does not exceed your cost as of December 31, 1986. Apply the allocation
described in the preceding discussion only to any excess distribution.
taxmap/pubs/p575-003.htm#en_us_publink1000226835If you receive a nonperiodic distribution before the annuity
starting date from a plan other than a qualified retirement plan, it is
allocated first to earnings (the taxable part) and then to the cost of the
contract (the tax-free part). This allocation rule applies, for example, to a
commercial annuity contract you bought directly from the issuer. You include in
your gross income the smaller of:
- The nonperiodic distribution, or
- The amount by which the cash value of the contract (figured
without considering any surrender charge) immediately before you receive the
distribution exceeds your investment in the contract at that time.
You bought an annuity from an insurance company. Before the annuity
starting date under your annuity contract, you received a $7,000 distribution.
At the time of the distribution, the annuity had a cash value of $16,000 and
your investment in the contract was $10,000. The distribution is allocated first
to earnings, so you must include $6,000 ($16,000 − $10,000) in your gross
income. The remaining $1,000 ($7,000 − $6,000) is a tax-free return of
part of your investment.
taxmap/pubs/p575-003.htm#en_us_publink1000226837Certain nonperiodic distributions received before the annuity
starting date are not subject to the allocation rule in the preceding
discussion. Instead, you include the amount of the payment in gross income only
to the extent that it exceeds the cost of the contract.
This exception applies to the following distributions.
- Distributions in full discharge of a contract that you receive
as a refund of what you paid for the contract or for the complete surrender,
redemption, or maturity of the contract.
- Distributions from life insurance or endowment contracts (other
than modified endowment contracts, as defined in section 7702A of the Internal
Revenue Code) that are not received as an annuity under the contracts.
- Distributions under contracts entered into before August 14,
1982, to the extent that they are allocable to your investment before August 14,
1982.
If you bought an annuity contract before August 14, 1982, and
made investments both before and after August 14, 1982, the distributed amounts
are allocated to your investment or to earnings in the following order.
- The part of your investment that was made before August 14,
1982. This part of the distribution is tax free.
- The earnings on the part of your investment that was made
before August 14, 1982. This part of the distribution is taxable.
- The earnings on the part of your investment that was made
after August 13, 1982. This part of the distribution is taxable.
- The part of your investment that was made after August 13,
1982. This part of the distribution is tax free.
If you receive U.S. savings bonds in a taxable distribution from a retirement or
profit-sharing plan, report the value of the bonds at the time of distribution
as income. The value of the bonds includes accrued interest. When you cash the
bonds, your Form 1099-INT will show the total interest accrued, including the
part you reported when the bonds were distributed to you. For information on how
to adjust your interest income for U.S. savings bond interest you previously
reported, see
How To Report Interest Income
in chapter 1 of Publication 550, Investment Income and Expenses.
taxmap/pubs/p575-003.htm#en_us_publink1000226839
If you borrow money from your retirement plan, you must treat the loan as a
nonperiodic distribution from the plan unless it qualifies for the exception to
this loan-as-distribution rule explained later. This treatment also applies to
any loan under a contract purchased under your retirement plan, and to the value
of any part of your interest in the plan or contract that you pledge or assign
(or agree to pledge or assign). It applies to loans from both qualified and
nonqualified plans, including commercial annuity contracts you purchase directly
from the issuer. Further, it applies if you renegotiate, extend, renew, or
revise a loan that qualified for the exception below if the altered loan does
not qualify. In that situation, you must treat the outstanding balance of the
loan as a distribution on the date of the transaction.
You determine how much of the loan is taxable using the allocation
rules for nonperiodic distributions discussed under
Figuring the Taxable Amount, earlier. The taxable part may be subject to the additional
tax on early distributions. It is not an eligible rollover distribution and does
not qualify for the 10-year tax option.
At least part of certain loans under a qualified employee plan,
qualified employee annuity, tax-sheltered annuity (403(b) plan), or government
plan is not treated as a distribution from the plan. This exception to the
loan-as-distribution rule applies only to a loan that either:
- Is used to acquire your main home, or
- Must be repaid within 5 years.
If a loan qualifies for this exception, you must treat it as
a nonperiodic distribution only to the extent that the loan, when added to the
outstanding balances of all your loans from all plans of your employer (and
certain related employers) exceeds the lesser of:
- $50,000, or
- Half the present value (but not less than $10,000) of your
nonforfeitable accrued benefit under the plan, determined without regard to any
accumulated deductible employee contributions.
You must reduce the $50,000 amount if you already had an outstanding
loan from the plan during the 1-year period ending the day before you took out
the loan. The amount of the reduction is your highest outstanding loan balance
during that period minus the outstanding balance on the date you took out the
new loan. If this amount is zero or less, ignore it.
taxmap/pubs/p575-003.htm#en_us_publink1000226842To qualify for the exception to the loan-as-distribution rule,
the loan must require substantially level payments at least quarterly over the
life of the loan. If the loan is from a designated Roth account, the payments
must be satisfied separately for that part of the loan and for the part of the
loan from other accounts under the plan. This level payment requirement does not
apply to the period in which you are on a leave of absence without pay or with a
rate of pay that is less than the required installment. Generally, this leave of
absence must not be longer than 1 year. You must repay the loan within 5 years
from the date of the loan (unless the loan was used to acquire your main home).
Your installment payments after the leave ends must not be less than your
original payments.
However, if your plan suspends your loan payments for any part
of the period during which you are in the uniformed services, you will not be
treated as having received a distribution even if the suspension is for more
than 1 year and the term of the loan is extended. The loan payments must resume
upon completion of such period and the loan must be repaid in substantially
level installments within 5 years from the date of the loan (unless the loan was
used to acquire your main home) plus the period of suspension.
taxmap/pubs/p575-003.htm#en_us_publink1000226843On May 1, 2010, you borrowed $40,000 from your retirement plan.
The loan was to be repaid in level monthly installments over 5 years. The loan
was not used to acquire your main home. You make nine monthly payments and start
an unpaid leave of absence that lasts for 12 months. You were not in a uniformed
service during this period. After the leave period ends and you resume active
employment, you resume making repayments on the loan. You must repay this loan
by April 30, 2015 (5 years from the date of this loan). You can increase your
monthly installments or you can make the original monthly installments and on
April 30, 2015, pay the balance.
taxmap/pubs/p575-003.htm#en_us_publink1000226844The facts are the same as in Example 1, except that you are on
a leave of absence performing service in the uniformed services for 2 years. The
loan payments were suspended for that period. You must resume making loan
payments at the end of that period and the loan must be repaid by April 30, 2017
(5 years from the date of the loan plus the period of suspension).
taxmap/pubs/p575-003.htm#en_us_publink1000226845In determining loan balances for purposes of applying the exception
to the loan-as-distribution rule, you must add the balances of all your loans
from all plans of your employer and from all plans of your employers who are
treated as a single employer. Treat separate employers' plans as plans of a
single employer if they are treated that way under other qualified retirement
plan rules because the employers are related.
Employers are related if they are:
- Members of a controlled group of corporations,
- Businesses under common control, or
- Members of an affiliated service group.
An affiliated service group generally is two or more service
organizations whose relationship involves an ownership connection. Their
relationship also includes the regular or significant performance of services by
one organization for or in association with another.
taxmap/pubs/p575-003.htm#en_us_publink1000226846If the loan from a qualified plan is not treated as a distribution
because the exception applies, you cannot deduct any of the interest on the loan
during any period that:
- The loan is secured by amounts from elective deferrals under
a qualified cash or deferred arrangement (section 401(k) plan) or a salary
reduction agreement to purchase a tax-sheltered annuity, or
- You are a key employee as defined in section 416(i) of the
Internal Revenue Code.
If your loan is treated as a distribution, you should receive a Form 1099-R
showing code "L" in box 7.
taxmap/pubs/p575-003.htm#en_us_publink1000226848
If your loan is treated as a distribution, you must reduce your investment in
the contract to the extent that the distribution is tax free under the
allocation rules for qualified plans explained earlier. Repayments of the loan
increase your investment in the contract to the extent that the distribution is
taxable under those rules.
If you receive a loan under a nonqualified plan other than a
403(b) plan, including a commercial annuity contract that you purchase directly
from the issuer, you increase your investment in the contract to the extent that
the distribution is taxable under the general allocation rule for nonqualified
plans explained earlier. Repayments of the loan do not affect your investment in
the contract. However, if the distribution is excepted from the general
allocation rule (for example, because it is made under a contract entered into
before August 14, 1982), you reduce your investment in the contract to the
extent that the distribution is tax free and increase it for loan repayments to
the extent that the distribution is taxable.
taxmap/pubs/p575-003.htm#en_us_publink1000226849If you transfer without full and adequate consideration an annuity
contract issued after April 22, 1987, you are treated as receiving a nonperiodic
distribution. The distribution equals the excess of:
- The cash surrender value of the contract at the time of transfer,
over
- Your investment in the contract at that time.
This rule does not apply to transfers between spouses or transfers
between former spouses incident to a divorce.
No gain or loss is recognized on an exchange of an annuity contract
for another annuity contract if the insured or annuitant remains the same.
However, if an annuity contract is exchanged for a life insurance or endowment
contract, any gain due to interest accumulated on the contract is ordinary
income.
If you transfer a full or partial interest in a tax-sheltered
annuity that is not subject to restrictions on early distributions to another
tax-sheltered annuity, the transfer qualifies for nonrecognition of gain or
loss.
If you exchange an annuity contract issued by a life insurance
company that is subject to a rehabilitation, conservatorship, or similar state
proceeding for an annuity contract issued by another life insurance company, the
exchange qualifies for nonrecognition of gain or loss. The exchange is tax free
even if the new contract is funded by two or more payments from the old annuity
contract. This also applies to an exchange of a life insurance contract for a
life insurance, endowment, annuity, or a qualified long-term care insurance
contract.
If you transfer part of the cash surrender value of an existing
annuity contract for a new annuity contract issued by another insurance company,
the transfer qualifies for nonrecognition of gain or loss. The funds must be
transferred directly between the insurance companies. Your investment in the
original contract immediately before the exchange is allocated between the
contracts based on the percentage of the cash surrender value allocated to each
contract.
taxmap/pubs/p575-003.htm#en_us_publink1000226851You own an annuity contract issued by ABC Insurance. You assign
60% of the cash surrender value of that contract to DEF Insurance to purchase an
annuity contract. The funds are transferred directly between the insurance
companies. You do not recognize any gain or loss on the transaction. After the
exchange, your investment in the new contract is equal to 60% of your investment
in the old contract immediately before the exchange. Your investment in the old
contract is equal to 40% of your original investment in that contract.
taxmap/pubs/p575-003.htm#en_us_publink1000226852If you receive cash from the surrender of one contract and invest
the cash in another contract, you generally do not have a tax-free transfer.
However, you can elect to receive tax-free treatment for a cash distribution
from an insurance company that is subject to a rehabilitation, conservatorship,
insolvency, or similar state proceeding if all of the following conditions are
met.
- You withdraw all the cash to which you are entitled.
- You reinvest the proceeds within 60 days in a single contract
issued by another insurance company.
- You assign all rights to any future distributions to the new
issuer if the cash distribution is restricted by the state proceeding to an
amount that is less than required for full settlement.
- An exchange of these contracts would otherwise qualify as
a tax-free transfer.
You must give the new issuer a statement containing the following
information.
- The amount of cash distributed under the old contract.
- The amount of cash reinvested in the new contract.
- Your investment in the old contract on the date of the initial
distribution.
You must also attach the following items to your timely filed
income tax return for the year of the initial distribution.
- A copy of the statement you gave to the new issuer.
- A statement that contains the words "ELECTION UNDER REV. PROC.
92-44," the new issuer's name, and the policy number or similar identifying
information for the new contract.
If you make a tax-free exchange of an annuity contract for another
annuity contract issued by a different company, the exchange will be shown on
Form 1099-R with a code "6" in box 7. You need not report this on your tax
return.
taxmap/pubs/p575-003.htm#en_us_publink1000226854If you acquire an annuity contract in a tax-free exchange for
another annuity contract, its date of purchase is the date you purchased the
annuity you exchanged. This rule applies for determining if the annuity
qualifies for exemption from the tax on early distributions as an immediate
annuity. See
Tax on Early Distributions, later.
| This section on lump-sum distributions only applies if the
plan participant was born before January 2, 1936. If the plan participant was
born after January 1, 1936, the taxable amount of this nonperiodic payment is
reported as discussed earlier. |
A lump-sum distribution is the distribution or payment in one tax year of a plan
participant's entire balance from all of the employer's qualified plans of one
kind (for example, pension, profit-sharing, or stock bonus plans). A
distribution from a nonqualified plan (such as a privately purchased commercial
annuity or a section 457 deferred compensation plan of a state or local
government or tax-exempt organization) cannot qualify as a lump-sum
distribution.
The participant's entire balance from a plan does not include
certain forfeited amounts. It also does not include any deductible voluntary
employee contributions allowed by the plan after 1981 and before 1987.
If you receive a lump-sum distribution from a qualified employee
plan or qualified employee annuity and the plan participant was born before
January 2, 1936, you may be able to elect optional methods of figuring the tax
on the distribution. The part from active participation in the plan before 1974
may qualify as capital gain subject to a 20% tax rate. The part from
participation after 1973 (and any part from participation before 1974 that you
do not report as capital gain) is ordinary income. You may be able to use the
10-year tax option, discussed later, to figure tax on the ordinary income part.
Each individual, estate, or trust who receives part of a lump-sum
distribution on behalf of a plan participant who was born before January 2,
1936, can choose whether to elect the optional methods for the part each
received. However, if two or more trusts receive the distribution, the plan
participant or the personal representative of a deceased participant must make
the choice.
Use Form 4972 to figure the separate tax on a lump-sum distribution using the
optional methods. The tax figured on Form 4972 is added to the regular tax
figured on your other income. This may result in a smaller tax than you would
pay by including the taxable amount of the distribution as ordinary income in
figuring your regular tax.
taxmap/pubs/p575-003.htm#en_us_publink1000226858If you receive a distribution as an alternate payee under a qualified
domestic relations order (discussed earlier under
General Information), you may be able to choose the optional tax computations for
it. You can make this choice for a distribution that would be treated as a
lump-sum distribution had it been received by your spouse or former spouse (the
plan participant). However, for this purpose, the balance to your credit does
not include any amount payable to the plan participant.
If you choose an optional tax computation for a distribution
received as an alternate payee, this choice will not affect any election for
distributions from your own plan.
taxmap/pubs/p575-003.htm#en_us_publink1000226860One or all of the recipients of a lump-sum distribution can use
the optional tax computations. See
Multiple recipients of a lump-sum distribution
in the instructions for Form 4972.
taxmap/pubs/p575-003.htm#en_us_publink1000226861A separated employee's vested percentage in his or her retirement
benefit may increase if he or she is rehired by the employer within five years
following separation from service. This possibility does not prevent a
distribution made before reemployment from qualifying as a lump-sum
distribution. However, if the employee elected an optional method of figuring
the tax on the distribution and his or her vested percentage in the previous
retirement benefit increases after reemployment, the employee must recapture the
tax saved. This is done by increasing the tax for the year in which the increase
in vesting first occurs.
taxmap/pubs/p575-003.htm#en_us_publink1000226862The following distributions do not qualify as lump-sum distributions
for the capital gain treatment or 10-year tax option.
- The part of a distribution not rolled over if the distribution
is partially rolled over to another qualified plan or an IRA.
- Any distribution if an earlier election to use either the
5- or 10-year tax option had been made after 1986 for the same plan participant.
- U.S. Retirement Plan Bonds distributed with a lump sum.
- Any distribution made during the first five tax years that
the participant was in the plan, unless it was made because the participant
died.
- The current actuarial value of any annuity contract included
in the lump sum. (Form 1099-R, box 8, should show this amount, which you use
only to figure tax on the ordinary income part of the distribution.)
- Any distribution to a 5% owner that is subject to penalties
under section 72(m)(5)(A) of the Internal Revenue Code.
- A distribution from an IRA.
- A distribution from a tax-sheltered annuity (section 403(b)
plan).
- A distribution of the redemption proceeds of bonds rolled
over tax free to a qualified pension plan, etc., from a qualified bond purchase
plan.
- A distribution from a qualified plan if the participant or
his or her surviving spouse previously received an eligible rollover
distribution from the same plan (or another plan of the employer that must be
combined with that plan for the lump-sum distribution rules) and the previous
distribution was rolled over tax free to another qualified plan or an IRA.
- A distribution from a qualified plan that received a rollover
after 2001 from an IRA (other than a conduit IRA), a governmental section 457
plan, or a section 403(b) tax-sheltered annuity on behalf of the plan
participant.
- A distribution from a qualified plan that received a rollover
after 2001 from another qualified plan on behalf of that plan participant's
surviving spouse.
- A corrective distribution of excess deferrals, excess contributions,
excess aggregate contributions, or excess annual additions.
- A lump-sum credit or payment from the Federal Civil Service
Retirement System (or the Federal Employees' Retirement System).
If you receive a lump-sum distribution, you may have the following
options for how to treat the taxable part.
- Report the part of the distribution from participation before
1974 as a capital gain (if you qualify) and the part from participation after
1973 as ordinary income.
- Report the part of the distribution from participation before
1974 as a capital gain (if you qualify) and use the 10-year tax option to figure
the tax on the part from participation after 1973 (if you qualify).
- Use the 10-year tax option to figure the tax on the total
taxable amount (if you qualify).
- Roll over all or part of the distribution. See
Rollovers, later. No tax is currently due on the part rolled over.
Report any part not rolled over as ordinary income.
- Report the entire taxable part of the distribution as ordinary
income on your tax return.
The first three options are explained in the following discussions.
taxmap/pubs/p575-003.htm#en_us_publink1000226865You can choose to use the 10-year tax option or capital gain
treatment only once after 1986 for any plan participant. If you make this
choice, you cannot use either of these optional treatments for any future
distributions for the participant.
Complete Form 4972 and attach it to your Form 1040 if you choose to use one or
both of the tax options. If you received more than one lump-sum distribution for
a plan participant during the year, you must add them together in your
computation. If you and your spouse are filing a joint return and you both have
received a lump-sum distribution, each of you should complete a separate Form
4972.
taxmap/pubs/p575-003.htm#en_us_publink1000226866You must decide to use the tax options before the end of the
time, including extensions, for making a claim for credit or refund of tax. This
is usually 3 years after the date the return was filed or 2 years after the date
the tax was paid, whichever is later. (Returns filed before their due date are
considered filed on their due date.)
taxmap/pubs/p575-003.htm#en_us_publink1000226867You can change your mind and decide not to use the tax options
within the time period just discussed. If you change your mind, file Form 1040X,
Amended U.S. Individual Income Tax Return, with a statement saying you do not
want to use the optional lump-sum treatment. Generally, you must pay any
additional tax due to the change with the Form 1040X.
taxmap/pubs/p575-003.htm#en_us_publink1000226868If you elect capital gain treatment (but not the 10-year tax
option) for a lump-sum distribution, include the ordinary income part of the
distribution on Form 1040, lines 16a and 16b; or on Form 1040NR, lines 17a and
17b. Enter the capital gain part of the distribution in Part II of Form 4972.
Include the tax from Form 4972, line 7 in the total on Form 1040, line 44; or on
Form 1040NR, line 42.
If you elect the 10-year tax option, do not include any part
of the distribution on Form 1040, lines 16a or 16b; or on Form 1040NR, lines 17a
or 17b. Report the entire distribution in Part III of Form 4972 or, if you also
elect capital gain treatment, report the capital gain part in Part II and the
ordinary income part in Part III. Include the tax from Form 4972, line 30 in the
total on Form 1040, line 44; or on Form 1040NR, line 42.
taxmap/pubs/p575-003.htm#en_us_publink1000226869The taxable part of a lump-sum distribution is the employer's
contributions and income earned on your account. You may recover your cost in
the lump sum and any net unrealized appreciation (NUA) in employer securities
tax free.
taxmap/pubs/p575-003.htm#en_us_publink1000226870In general, your cost is the total of:
- The plan participant's nondeductible contributions to the
plan,
- The plan participant's taxable costs of any life insurance
contract distributed,
- Any employer contributions that were taxable to the plan participant,
and
- Repayments of any loans that were taxable to the plan participant.
You must reduce this cost by amounts previously distributed
tax free.
The NUA in employer securities (box 6 of Form 1099-R) received
as part of a lump-sum distribution is generally tax free until you sell or
exchange the securities. (See
Distributions of employer securities under
Figuring the Taxable Amount,
earlier.) However, if you choose to include the NUA in your income for the year
of the distribution and there is an amount in box 3 of Form 1099-R, part of the
NUA will qualify for capital gain treatment. Use the
NUA Worksheet
in the instructions for Form 4972 to find the part that qualifies.
You may be able to claim a loss on your return if you receive a lump-sum
distribution that is less than the plan participant's cost. You must receive the
distribution entirely in cash or worthless securities. The amount you can claim
is the difference between the participant's cost and the amount of the cash
distribution, if any.
To claim the loss, you must itemize deductions on Schedule A
(Form 1040). Show the loss as a miscellaneous deduction subject to the
2%-of-adjusted-gross-income limit.
You cannot claim a loss if you receive securities that are not
worthless, even if the total value of the distribution is less than the plan
participant's cost. You recognize gain or loss only when you sell or exchange
the securities.
| A loss under a nonqualified plan, such as a commercial variable
annuity, is deductible in the same manner as a lump-sum distribution. |
taxmap/pubs/p575-003.htm#en_us_publink1000226875Capital gain treatment applies only to the taxable part of a
lump-sum distribution resulting from participation in the plan before 1974. The
amount treated as capital gain is taxed at a 20% rate. You can elect this
treatment only once for any plan participant, and only if the plan participant
was born before January 2, 1936.
Complete Part II of Form 4972 to choose the 20% capital gain
election.
taxmap/pubs/p575-003.htm#en_us_publink1000226876Generally, figure the capital gain and ordinary income parts
of a lump-sum distribution by using the following formulas.
| | | | |
| Capital Gain: |
| | Total Taxable Amount | × | Months of active participation before 1974 |
| | Total months of active participation |
| Ordinary Income: |
| | Total Taxable Amount | × | Months of active participation after 1973 |
| | Total months of active participation |
In figuring the months of active participation before 1974, count
as 12 months any part of a calendar year in which the plan participant actively
participated under the plan. For active participation after 1973, count as one
month any part of a calendar month in which the participant actively
participated in the plan.
The capital gain part should be shown in box 3 of Form 1099-R
or other statement given to you by the payer of the distribution.
If any federal estate tax (discussed under
Survivors and Beneficiaries,
later) was paid on the lump-sum distribution, you must decrease
the capital gain by the amount of estate tax applicable to it. Follow the Form
4972 instructions for Part II, line 6, to figure the part of the estate tax
applicable to the capital gain that is used to reduce the capital gain. If you
do not make the capital gain election, enter on line 18 of Part III the estate
tax attributable to the total lump-sum distribution. For information on how to
figure the estate tax attributable to the lump-sum distribution, get the
instructions for Form 706, United States Estate (and Generation-Skipping
Transfer) Tax Return, or contact the administrator of the decedent's estate.
The 10-year tax option is a special formula used to figure a
separate tax on the ordinary income part of a lump-sum distribution. You pay the
tax only once, for the year in which you receive the distribution, not over the
next 10 years. You can elect this treatment only once for any plan participant,
and only if the plan participant was born before January 2, 1936.
The ordinary income part of the distribution is the amount shown in box 2a of
the Form 1099-R given to you by the payer, minus the amount, if any, shown in
box 3. You can also treat the capital gain part of the distribution (box 3 of
Form 1099-R) as ordinary income for the 10-year tax option if you do not choose
capital gain treatment for that part.
Complete Part III of Form 4972 to choose the 10-year tax option. You must use
the special Tax Rate Schedule shown in the instructions for Part III to figure
the tax.
taxmap/pubs/p575-003.htm#en_us_publink1000226885The following examples show how to figure the separate tax on
Form 4972.
taxmap/pubs/p575-003.htm#en_us_publink1000226886Robert C. Smith, who was born in 1935, retired from Crabtree
Corporation in 2010. He withdrew the entire amount to his credit from the
company's qualified pension plan. In December 2010, he received a total
distribution of $175,000 (the $25,000 tax-free part of the distribution
consisting of employee contributions plus the $150,000 taxable part of the
distribution consisting of employer contributions and earnings on all
contributions).
The payer gave Robert a Form 1099-R, which shows the capital
gain part of the taxable distribution (the part attributable to participation
before 1974) to be $10,000. Robert elects 20% capital gain treatment for this
part. Filled-in copies of Robert's Form 1099-R and Form 4972 follow. He enters
$10,000 on Form 4972, Part II, line 6 and $2,000 ($10,000 × 20%) on Part
II, line 7.
The ordinary income part of the taxable distribution is $140,000
($150,000 – $10,000). Robert elects to figure the tax on this part using
the 10-year tax option. He enters $140,000 on Form 4972, Part III, line 8. Then
he completes the rest of Form 4972 and includes the tax of $24,270 in the total
on line 44 of his Form 1040.
taxmap/pubs/p575-003.htm#en_us_publink1000226887Mary Brown, who was born in 1935, sold her business in 2010.
She withdrew her entire interest in the qualified profit-sharing plan she had
set up as the sole proprietor.
The cash part of the distribution, $160,000, is all ordinary
income and is shown on her Form 1099-R below. She chooses to figure the tax on
this amount using the 10-year tax option. Mary also received an annuity contract
as part of the distribution from the plan. Box 8, Form 1099-R, shows that the
current actuarial value of the annuity was $10,000. She enters these figures on
Form 4972 (shown later).
After completing Form 4972, she includes the tax of $28,070 in
the total on Form 1040, line 44.
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