Generally, if you did not pay any part of the cost of your employee pension or annuity and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. You must report them on your income tax return.

Partly taxable payments. If you paid part of the cost of your annuity, you are not taxed on the part of the annuity you receive that represents a return of your cost. The rest of the amount you receive is taxable. Your annuity starting date (defined later) determines the method you use to figure the tax-free and the taxable parts of your annuity payments. If you contributed to your pension or annuity and your annuity starting date is:

1. After November 18, 1996, and your payments are from a qualified plan, you must use the Simplified Method. You generally must use the General Rule only for nonqualified plans.
2. After July 1, 1986, but before November 19, 1996, you can use either the General Rule or, if you qualify, the Simplified Method, to figure the taxability of your payments from qualified and nonqualified plans. See Simplified Method, later.

Changing the method under prior law. If your annuity starting date is after July 1, 1986 (but before November 19, 1996), you can change the way you figure your pension cost recovery exclusion. You can change from the General Rule to the Simplified Method, or the other way around.

How to change it. Make the change by filing amended returns for all your tax years beginning with the year in which your annuity starting date occurred. You must use the same method for all years. Generally, you can make the change only within 3 years from the due date of your return for the year in which you received your first annuity payment. You can make the change later if the date of the change is within 2 years after you paid the tax for that year.

If your annuity starting date is after November 18, 1996, you cannot change the method. You generally must use the Simplified Method for annuity payments from a qualified plan.

More than one program. If you receive benefits from more than one program, such as a pension plan and a profit-sharing plan, you must figure the taxable part of each separately. Make separate computations even if the benefits from both are included in the same check. For example, benefits from one of your programs could be fully taxable, while the benefits from your other program could be taxable under the General Rule or the Simplified Method. Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract.

Railroad retirement benefits. Part of the railroad retirement benefits you receive is treated for tax purposes like social security benefits, and part is treated like an employee pension. For information about railroad retirement benefits treated as an employee pension, see Railroad Retirement in Publication 575.

Credit for the elderly or the disabled. If you receive a pension or annuity, you may be able to take the credit for the elderly or the disabled. See chapter 34.

Withholding and estimated tax. The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable parts of amounts paid to you. You can choose not to have tax withheld except for amounts paid to you that are eligible rollover distributions. See Eligible rollover distributions under Rollovers, later. You make this choice by filing Form W-4P.

For payments other than eligible rollover distributions, you can tell the payer how to withhold by filing Form W-4P. If an eligible rollover distribution is paid directly to you, 20% will generally be withheld. There is no withholding on a direct rollover of an eligible rollover distribution. See Direct rollover option under Rollovers, later. If you choose not to have tax withheld or you do not have enough tax withheld, you may have to pay estimated tax.

For more information, see Pensions and Annuities under Withholding in chapter 5.

Loans. If you borrow money from an employer's qualified pension or annuity plan, a tax-sheltered annuity program, a government plan, or from a contract purchased under any of these plans, you may have to treat the loan as a distribution. This means that you may have to include in income all or part of the amount borrowed. Even if you do not have to treat the loan as a distribution, you might not be able to deduct the interest on the loan in some situations. For details, see Loans Treated as Distributions in Publication 575. For information on the deductibility of interest, see chapter 25.

Elective deferrals. Some retirement plans allow you to choose (elect) to have part of your pay contributed by your employer to a retirement fund, rather than have it paid to you. You do not pay tax on this money until you receive it in a distribution from the fund.

Elective deferrals generally include elective employer contributions to cash or deferred arrangements (known as section 401(k) plans), section 501(c)(18) plans, salary reduction simplified employee pension (SARSEP) plans, SIMPLE plans, and tax-sheltered annuities provided for employees of tax-exempt organizations and public schools.

Beginning in 1998, amounts deferred in certain employee benefit plans will increase the tax-deferred amount that can be contributed by the employer at the election of the employee.

For information on the tax treatment of elective deferrals, including their limits, see Limits on Exclusion for Elective Deferrals in Publication 575. For information about tax-sheltered annuities, see Publication 571, Tax-Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations.

H.R. 10 (Keogh) plans. Keogh plans are retirement plans that can only be set up by a sole proprietor or a partnership (but not a partner). They can cover self-employed persons, such as the sole proprietor or partners, as well as regular (common-law) employees.

Distributions from these plans are usually fully taxable. If you have an investment (cost) in the plan, however, your pension or annuity payments from a qualified plan are taxed under the Simplified Method.

Deferred compensation plans of state and local governments and tax-exempt organizations. If you participate in one of these nonqualified plans (known as section 457 plans), you will not be taxed currently on your pay that is deferred under the plan. You or your beneficiary will be taxed on this deferred pay only when it is distributed or otherwise made available to either of you.

Distributions of deferred pay are not eligible for the 5- or 10-year tax option and rollover treatment (discussed later). Distributions are, however, subject to the tax for failure to make minimum distributions, discussed later.

For general information on these deferred compensation plans and their limits, see Section 457 Deferred Compensation Plans in Publication 575.

Cost

Before you can figure how much, if any, of your pension or annuity benefits is taxable, you must determine your cost in the plan (your investment). Your total cost in the plan includes everything that you paid. It also includes amounts your employer paid that were taxable at the time paid. Cost does not include any amounts you deducted or excluded from income.

From this total cost paid or considered paid by you, subtract any refunds of premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment.

The annuity starting date is the later of the first day of the first period for which you receive a payment from the plan or the date on which the plan's obligation becomes fixed.

Your employer or the organization that pays you the benefits (plan administrator) should show your cost in Box 5 of your Form 1099-R.

Foreign employment. If you worked in a foreign country and your employer contributed to your retirement plan, a part of those payments may be considered part of your cost. The contributions that apply were made either:

1. Before 1963, or
2. After December 1996 if you performed the services of a foreign missionary.

For details, see Foreign employment under Investment in the Contract (Cost) in Publication 575.

Simplified Method

The following discussion outlines the rules that apply for using the Simplified Method.

What is the Simplified Method. The Simplified Method is one of the two methods used to figure the tax-free part of each annuity payment using the annuitant's age (or combined ages if more than one annuitant) at his or her (or their) annuity starting date. The other method is the General Rule (discussed later).

Who must use the Simplified Method. You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive pension or annuity payments from a qualified plan or annuity unless you were at least 75 years old and entitled to annuity payments from a qualified plan that are guaranteed for 5 years or more.

Who must use the General Rule. You must use the General Rule if you receive pension or annuity payments from:

1. A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or
2. A qualified plan if you are 75 or over and your annuity payments from the qualified plan are guaranteed for at least 5 years (regardless of your annuity starting date).

You can use the General Rule for a qualified plan if your annuity starting date is before November 19, 1996 (but after July 1, 1986), and you do not qualify to use, or choose not to use, the Simplified Method.

You cannot use the General Rule for a qualified plan if your annuity starting date is after November 18, 1996. Complete information on the General Rule, including the tables you need, is contained in Publication 939.

If you are 75 or over, and your annuity starting date is after November 18, 1996, you must use the General Rule if the payments are guaranteed for at least 5 years. You must use the Simplified Method if the payments are guaranteed for fewer than 5 years.

Note. If you are not sure whether your retirement plan is a qualified plan (that meets certain Internal Revenue Code requirements), ask your employer or plan administrator.

Guaranteed payments. Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to fewer than 5 years of guaranteed payments.

If you are the survivor of a deceased retiree, you can use the Simplified Method if the retiree used it.

Exclusion limits. Your annuity starting date determines the total amount that you can exclude from your taxable income over the years.

If your annuity starting date is after 1986, your exclusion is limited to your cost. If it was after July 1, 1986 (and before January 1, 1987), you can continue to take your monthly exclusion for as long as you receive your annuity.

In both cases, any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. This deduction is not subject to the 2%-of- adjusted-gross-income limit.

How to use it. Complete the following worksheet to figure your taxable annuity for 1998. If the annuity is payable only over your life, use your age at the birthday preceding your annuity starting date. For annuity starting dates beginning in 1998, if your annuity is payable over your life and the lives of other individuals, use your combined ages at the birthdays preceding the annuity starting date.

Be sure to keep a copy of the completed worksheet; it will help you figure your taxable pension in later years.

If your annuity starting date begins after December 31, 1997, and your annuity is payable over the lives of more than one annuitant, the total number of monthly annuity payments expected to be received is based on the combined ages of the annuitants at the annuity starting date. If your annuity starting date began before January 1, 1998, the total number of monthly annuity payments expected to be received is based on the primary annuitant's age at the annuity starting date.

Example. Bill Kirkland, age 65, began receiving retirement benefits on January 1, 1998, under a joint and survivor annuity. Bill's annuity starting date is January 1, 1998. The benefits are to be paid for the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.

Bill must use the Simplified Method because his annuity starting date is after November 18, 1996, and the payments are from a qualified plan. In addition, because his annuity starting date is after December 31, 1997, and his annuity is payable over the lives of more than one annuitant, he must combine his age with his wife's age in completing line 3 of the worksheet. He completes the worksheet as shown in Table 11-1.

Simplified Method Worksheet

Bill's tax-free monthly amount is $100 ($31,000 � 310 as shown on line 4 of the worksheet). Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. For any annuity payments received after 310 payments are paid, the full amount of the additional payments must be included in gross income.

If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on their final income tax return. This deduction is not subject to the 2%-of- adjusted-gross-income limit.

Had Bill's retirement annuity payments been from a nonqualified plan, he would have used the General Rule. He can only use the Simplified Method Worksheet for plans that are qualified.

Survivors

If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in income. (The retiree's cost has already been recovered tax free.)

If the retiree was reporting the annuity payments under the General Rule, apply the same exclusion percentage the retiree used to your initial payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully taxable.

If the retiree had used the Simplified Method, the monthly tax-free amount remains fixed. Continue to use the same monthly tax-free amount for your survivor payments from a qualified plan regardless of the annuity starting date of the retiree. See Simplified Method, earlier.

In both cases, if the annuity starting date is after 1986, the total exclusion over the years cannot be more than the cost.

If you are the survivor of an employee, or former employee, who died before becoming entitled to any annuity payments, you must figure the taxable and tax-free parts of your annuity payments. You may qualify for the $5,000 death benefit exclusion if the deceased individual died before August 21, 1996. If this exclusion applies to you, see How to adjust your cost in Publication 575.

Estate tax. If your annuity was a joint and survivor annuity that was included in the decedent's estate, an estate tax may have been paid on it. You can deduct, as a miscellaneous itemized deduction, the part of the total estate tax that was based on the annuity. This deduction is not subject to the 2%-of-adjusted-gross-income limit. The deceased annuitant must have died after the annuity starting date. This amount cannot be deducted in one year. It must be deducted in equal amounts over your remaining life expectancy.

How To Report

If you file Form 1040, report your total annuity on line 16a and the taxable part on line 16b. If your pension or annuity is fully taxable, enter it on line 16b; do not make an entry on line 16a.

If you file Form 1040A, report your total annuity on line 11a and the taxable part on line 11b. If your pension or annuity is fully taxable, enter it on line 11b; do not make an entry on line 11a.

More than one annuity. If you receive more than one annuity and at least one of them is not fully taxable, enter the total amount received from all annuities on line 16a, Form 1040, or line 11a, Form 1040A, and enter the taxable part on line 16b, Form 1040, or line 11b, Form 1040A. If all the annuities you receive are fully taxable, enter the total of all of them on line 16b, Form 1040, or line 11b, Form 1040A.

Joint return. If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a, Form 1040, or line 11a, Form 1040A, and report the taxable part on line 16b, Form 1040, or line 11b, Form 1040A.

Lump-Sum Distributions

You may be able to elect optional methods of figuring the tax on lump-sum distributions you receive from a qualified retirement plan (an employer's qualified pension, stock bonus, or profit-sharing plan). A qualified plan is a plan that meets certain requirements of the Internal Revenue Code. For information on a distribution you receive that includes employer securities, see Distributions of employer securities under Lump-Sum Distributions in Publication 575.

Distributions that qualify. A lump-sum distribution is paid within a single tax year. It is the distribution or payment of a plan participant's entire balance from all of the employer's qualified plans of one kind (i.e., pension, profit-sharing, or stock bonus plans). The participant's entire balance does not include deductible voluntary employee contributions or certain forfeited amounts.

The distribution is paid:

1. Because of the plan participant's death,
2. After the participant reaches age 59 1/2,
3. Because the participant, if an employee, separates from service, or
4. After the participant, if a self-employed individual, becomes totally and permanently disabled.

Tax treatment. You can recover your cost in the lump sum tax free. Also, you may be entitled to special tax treatment for the remaining part of the distribution.

In general, your cost consists of:

1. The plan participant's total nondeductible contributions to the plan,
2. The total of the plan participant's taxable costs of any life insurance contract distributed,
3. Any employer contributions that were taxable to the plan participant, and
4. Repayments of loans that were taxable to the plan participant.

You must reduce this cost by amounts previously distributed tax free.

Capital gain treatment. Only a plan participant who was born before 1936 can elect to treat a portion of the taxable part of a lump-sum distribution as a capital gain that is taxable at a 20% (.20) rate. This treatment applies to the portion you receive for the participation in the plan before 1974. You can elect this treatment only once for any plan participant. Use Form 4972, Tax on Lump-Sum Distributions, to make this choice.

5- or 10-year tax option. If the plan participant was born before 1936, you can elect to use the 5- or 10-year option to compute the tax on the ordinary income portion of the distribution. (This also includes the capital gain portion of the distribution if you do not elect the capital gain treatment for it.) To qualify, you must elect to use the 5- or 10-year tax option for all lump-sum distributions received in the tax year.

You may be able to figure the tax on a lump-sum distribution under the 5-year tax option even if the plan participant was born after 1935. You can choose this option for tax years beginning before the year 2000 only if the distribution is made on or after the date the participant reached age 59 1/2 and the distribution otherwise qualifies.

To qualify for the 5- or 10-year option for a distribution you receive for your own participation in the retirement plan, you must have been a participant in the plan for at least 5 full tax years. You can only make one lifetime election to use this option for any plan participant.

If you choose the 5-year tax option, you figure your tax, using Form 4972, as though the distribution were received over 5 years.

For tax years beginning after 1999, the 5-year tax option for figuring the tax on lump-sum distributions from a qualified retirement plan is repealed. However, a plan participant can continue to choose the 10-year tax option or the capital gain treatment for a lump-sum distribution that qualifies for the special tax treatment.

However, if you choose the 10-year tax option, you can instead treat the distribution as though it were received over 10 years using special tax rates. Form 4972 shows how to make this computation. The Form 4972 instructions contain a special tax rate schedule that you must use in making the 10-year tax option computation. Publication 575 illustrates how to complete Form 4972 to figure the separate tax.

Form 1099-R. If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain, and box 2a minus box 3 is the ordinary income. If you do not get a Form 1099-R, or if you have questions about it, contact your plan administrator.

Rollovers

Generally, a rollover is a tax-free distribution to you of cash or other assets from a qualified retirement plan that you transfer to an eligible retirement plan. However, see Direct rollover option, later.

An eligible retirement plan is an IRA, a qualified employee retirement plan, or a qualified annuity plan. See chapter 18 for information on rollovers from an IRA.

This discussion refers to the traditional IRA. The new Roth IRA that can be established beginning in 1998 is discussed in chapter 18.

In general, the most you can roll over is the part that would be taxable if you did not roll it over. You cannot roll over your contributions, other than your deductible employee contributions. You do not pay tax on the amount that you roll over. This amount, however, is generally taxable later when it is paid to you or your survivor.

You must complete the rollover by the 60th day following the day on which you receive the distribution. (This 60-day period is extended for the period during which the distribution is in a frozen deposit in a financial institution.) For all rollovers to an IRA, you must irrevocably elect rollover treatment by written notice to the trustee or issuer of the IRA.

Eligible rollover distributions. Generally, you can roll over any part of the taxable portion of most nonperiodic distributions from a qualified retirement plan, unless it is a required minimum distribution.

Hardship distributions. After December 31, 1998, hardship distributions from 401(k) plans and similar employer-sponsored retirement plans will no longer be treated as eligible rollover distributions.

Direct rollover option. You can choose to have the administrator of your old plan transfer the distribution directly from your old plan to the new plan (if permitted) or IRA. If you decide on a rollover, it is generally to your advantage to choose this direct rollover option. Under this option, the plan administrator would not withhold tax from your distribution.

Withholding tax. If you choose to have the distribution paid to you, it is taxable in the year distributed unless you roll it over to a new plan or IRA within 60 days. The plan administrator must withhold income tax of 20% from the taxable distribution paid to you. (See Pensions and Annuities under Withholding in chapter 5.) This means that, if you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld. The administrator should give you a written explanation of your distribution options within a reasonable period of time before making an eligible rollover distribution.

Deductible voluntary employee contributions. If you receive an eligible rollover distribution from your employer's qualified plan of part of the balance of your accumulated deductible voluntary employee contributions, you can roll over tax free any part of this distribution. The rollover can be either to an IRA or to certain other qualified plans.

Rollover by surviving spouse or other beneficiary. You may be entitled to roll over into an IRA part or all of a retirement plan distribution you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. However, you cannot roll it over to another qualified retirement plan.

A beneficiary other than the employee's surviving spouse cannot roll over a distribution.

Alternate payee under qualified domestic relations order. You may be able to roll over all or any part of a distribution from a qualified employer plan that you receive under a qualified domestic relations order (QDRO). If you receive the distribution as an employee's spouse or former spouse under a QDRO, the rollover rules apply to you (the alternate payee) as if you were the employee. You can rollover the distribution from the plan into an IRA or to another eligible retirement plan. See Publication 575 for more information on benefits received under a QDRO.

Bond purchase plans. The Department of the Treasury stopped issuing U.S. Retirement Plan Bonds after April 30, 1982. They are a special series of interest-bearing bonds that retirement plans could buy.

If you redeem a retirement bond, you can defer the tax on the amount received by rolling it over to an IRA as discussed under Rollovers in chapter 18.

For more information on the rules for rolling over distributions, see Publication 575.

Tax on Early Distributions

Distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59 1/2 (and amounts you receive when you cash in retirement bonds before you reach age 59 1/2) are usually subject to an additional tax of 10%. The tax applies to the taxable part of the distribution.

For this purpose, a qualified retirement plan includes:

1. A qualified employee retirement plan,
2. A qualified annuity plan,
3. A tax-sheltered annuity plan for employees of public schools or tax-exempt organizations, or
4. An IRA, including a SIMPLE IRA.

25% rate on certain early distributions from SIMPLE retirement accounts. Distributions from a SIMPLE retirement account are subject to IRA rules and are includible in income when withdrawn. An early withdrawal is generally subject to an additional tax of 10%. However, if the distribution is made within the first two years of participation in the SIMPLE plan, the additional tax is 25%. Your Form 1099-R should show distribution code "S" in box 7 if the 25% rate applies.

Exceptions to tax. The early distribution tax does not apply to distributions that are:

1. Made to you on or after the date on which you reach age 59 1/2,
2. Made to a beneficiary or to the estate of the plan participant or annuity holder on or after his or her death,
3. Made because you are totally and permanently disabled,
4. Made as part of a series of substantially equal periodic (at least annual) payments over your life expectancy or the joint life expectancy of you and your beneficiary (if from a qualified employee plan, payments must begin after separation from service),
5. Made to pay for qualified higher education expenses for yourself, your spouse, your children, or grandchildren to the extent that the distribution does not exceed the qualified higher education expenses for the taxable year,
6. Made to pay for a first-time home for yourself, your spouse, your children, your grandchildren, or your ancestors to the extent that the distribution is used by you within 120 days from the date of the distribution,
7. Made to you after you separated from service if the separation occurred during or after the calendar year in which you reached age 55,
8. Not more than your deductible medical expense (the medical expense that exceeds 7.5% of your adjusted gross income) whether or not you itemize deductions for the tax year,
9. Paid to alternate payees under qualified domestic relations orders,
10. Made to you if, as of March 1, 1986, you separated from service and began receiving benefits from the qualified plan under a written election that provides a specific schedule of benefit payments,
11. Made to you to correct excess deferrals, excess contributions, or excess aggregate contributions,
12. Allocable to investment in a deferred annuity contract before August 14, 1982,
13. From an annuity contract under a qualified personal injury settlement,
14. Made under an immediate annuity contract, or
15. Made from a deferred annuity contract purchased by your employer upon the termination of a qualified employee retirement plan or qualified annuity that is held by your employer until you separate from the service of the employer.

Only exceptions (1) through (6) and (8) apply to distributions from IRAs. Exceptions (7), (9) through (11) apply only to distributions from qualified employee plans. Exceptions (12) through (15) apply only to distributions from deferred annuity contracts not purchased by qualified employer plans.

Reporting tax or exception. If distribution code 1 is shown in box 7 of Form 1099-R, multiply the taxable part of the early distribution by 10% and enter the result on line 53 of Form 1040 and write "No" on the dotted line. You do not have to file Form 5329.

However, if you owe this tax and also owe any other additional tax on a distribution, you must file Form 5329 to report the taxes.

You do not have to file Form 5329 if you qualify for an exception to the 10% tax and distribution code 2, 3, or 4 is shown in box 7 of Form 1099-R. However, you must file Form 5329 if the code is not shown or the code shown is incorrect (e.g., code 1 is shown although you meet an exception).

Tax on Excess Accumulation

To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified plans and IRAs must begin on your required beginning date (defined next). If you are still working after you reach age 70 1/2, you are allowed to wait until you retire to satisfy the minimum distribution requirements unless you are a 5% owner or the distribution is from an IRA.

Beginning in 1997, you must begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of the:

1. Calendar year in which you reach age 70 1/2, or
2. Calendar year in which you retire.

Before 1997, you were required to begin receiving distributions from your retirement plan by April 1 of the year following the calendar year in which you reached age 70 1/2, regardless of whether or not you had retired. This rule still applies if you are a 5% owner or the distribution is from an IRA.

The new rule applies to qualified employee retirement plans, qualified annuity plans, deferred compensation plans under section 457, and tax-sheltered annuity programs (for benefits accruing after 1986).

Example. You reach age 70 1/2 on the date that is 6 calendar months after the date of your 70th birthday. For example, if you are retired and your 70th birthday was on July 1, 1997, you were age 70 1/2 on January 1, 1998. Your required beginning date is April 1, 1999. If your 70th birthday was on June 30, 1997, you were age 70 1/2 on December 30, 1997, and your required beginning date is April 1, 1998 unless you had not yet retired.

Exception (5% owners). If you are a 5% (or more) owner of the company maintaining the plan, you must still begin to receive distributions by April 1 of the calendar year after the year in which you reach age 70 1/2, regardless of when you retire.

Minimum distributions. These are regular periodic distributions that are large enough to use up the entire interest over your life expectancy or over the joint life expectancies of you and a designated surviving beneficiary (or over a shorter period).

Additional information. For more information on this rule and how to figure the required amount to be distributed, see Tax on Excess Accumulation in Publication 575.

Tax on failure to distribute. If you do not receive these required minimum distributions, you, as the payee, are subject to an additional excise tax. The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall.

State insurer delinquency proceedings. You might not receive the minimum distribution because of state insurer delinquency proceedings for an insurance company. If your payments are reduced below the minimum due to these proceedings, you should contact your plan administrator. Under certain conditions, you will not have to pay the excise tax.

Form 5329. You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan.

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