General
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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 your type of retirement plan. If your employer's plan has a separate account for each employee and any amount was contributed or allocated by you or your employer to your account, you are considered covered. This is called a defined contribution plan. With this type of plan, it does not matter if you have worked long enough to be vested.
In the other type of plan, the plan employer must make enough contributions (together with earnings) to provide the retirement benefit promised in the retirement plan. This is called a defined benefit plan. In this type of plan, if you meet the minimum age and years of service requirements to participate in your employer's plan, you are considered covered even if you decline coverage. It does not matter if you are vested for this type of plan, either.
The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. The "Pension Plan" box should have a mark in it if you were covered.
References: 5.2 Pensions and Annuities: Contributions How is the dollar limit for 403(b) plans affected by the nondiscrimination requirements related to highly compensated employees?
A 403(b) plan is a tax-sheltered annuity plan for employees of public schools and certain tax-exempt organizations. Under a special coverage and nondiscrimination rule, if any employee may make elective deferrals, the plan is considered discriminatory unless the opportunity to make contributions deferrals of more than $200 pursuant to a salary reduction agreement is available to all employees on a basis that does not discriminate in favor of highly compensated employees. For more information, refer to Internal Revenue Code section 403(b)(1)(D),(12)(A)(ii).
The maximum elective deferral for 2002 that an employee may make to a 403 (b) plan is $11,000.00. This will increase to $12,000.00 for 2003, and $13,000.00 for 2004. In addition, employees age 50 or over may be eligible to make catchup contributions of $1000.00 in 2002 (see Publication 571 (PDF) chapter 10).
For more information about 403 (b) plans, refer to Publication 571 (PDF), Tax Sheltered Annuity Plans 403 (b) Plans.
References: - Publication 571 (PDF), Tax Sheltered Annuity Plans 403 (b) Plans
- IRS Code Sec. 402(g) (1)
5.3 Pensions and Annuities: Distributions, Early Withdrawals, 10% Additional Tax What are the tax options for lump-sum distributions from retirement plans?
Special tax computations are allowed for qualifying recipients of certain lump-sum distributions from retirement plans. Refer to Tax Topic 412 which discusses Lump-Sum Distributions, or Publication 575 (PDF), Pension and Annuity Income.
References: I received a lump-sum distribution when I retired. Is there any special tax treatment on lump-sum distribution?
You may be able to elect optional methods of figuring the tax on lump-sum distributions you received from a qualified retirement plan.
A lump-sum distribution is the distribution or payment, within a single tax year, of an employees entire balance from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans). The distribution must have been made under specific conditions. For details, refer to Tax Topic 412 which discusses Lump Sum Distributions or Publication 575 (PDF), Pension and Annuity Income.
References: If we cash in a pension plan while in our thirties, what forms do we need to fill out?
You will need to file a Form 1040 and show the amount of withdrawal from your pension. Since you took the withdrawal before reaching age 59 1/2, you will need to pay a 10 percent additional tax on early distributions from qualified retirement plans that is reported on line 55 of Form 1040 . This tax applies to the distribution that you must include in gross income. It does not apply to any part of a distribution that is tax free, such as amounts that represent a return of your cost or that were rolled over to another retirement plan. You need to complete Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's) and other tax-favored accounts and attach it to the tax return.
References: - Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's, Annuities) and other tax-favored accounts
- Instructions for Form 5329, Additional Taxes on Qualified Plans (including IRA's) and other tax-favored accounts
- Tax Topic 558, Tax on early distributions from retirement plans
If we cash in a pension plan while in our thirties, when do we pay the taxes and penalties?
Because our tax system is a pay-as-you-go system, you may need to make an estimated tax payment by the due date for the quarter in which you received the distribution. When calculating your tax liability to determine whether you need to make an estimated tax payment, your total tax for the year should include the amount of the 10 percent additional tax on early distributions from qualified retirement plans unless any exception applies.
You would calculate the tax on Form 1040ES (PDF), Estimated Tax for Individuals, and any 10 percent additional tax on early distributions from qualified retirement plans on Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's) and other tax-favored accounts.
References: - Form 1040ES (PDF), Estimated Tax for Individuals
- Form 5329 (PDF), Additional Taxes Attributable on Qualified Plans (Including IRA's) and other tax-favored accounts
- Publication 505 (PDF), Tax Withholding and Estimated Tax
- Tax Topic 451, Individual retirement arrangements (IRAs)
- Tax Topic 558, Tax on early distributions from retirement plans
Can the 10% penalty for an early withdrawal from a retirement plan be deducted in the Adjusted Gross Income section of Form 1040 as a penalty on early withdrawal of savings?
No, the 10 percent additional tax on early distributions from qualified retirement plans you pay for a premature withdrawal does not qualify as a penalty for withdrawal of a savings account.
References: After I was terminated by my employer I received a lump sum distribution from the Pension Plan. The entire distribution was identified on Form 1099-R as taxable and 20% tax was withheld. I've been told I need to pay an additional 10% tax. Why am I being taxed twice if 100% of the distribution was taxable to begin with?
If you take a distribution from certain pension plans before you have reached 55 years of age, you may be subject to an additional 10 percent tax on early distribution. This 10 percent is in addition to the income tax you pay on the distribution. The total income tax you owe on your individual income tax return is reduced by any withholding or estimated tax payments, including the 20% withholding identified on your Form 1099-R.
References: 5.5 Pensions and Annuities: Rollovers How long do I have to roll over a retirement distribution?
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.) A written explanation of rollover must be given to you by the issuer making the distribution. For information on distributions which qualify for rollover treatment, refer to Tax Topic 413, Rollovers from Retirement Plans. For information on the Direct Rollover Option, refer to Chapter 1 of Publication 590 (PDF), Individual Retirement Arrangements (IRA's).
References: 17.4 Individual Retirement Arrangements (IRA): Traditional IRA If I am covered by a employer sponsored retirement plan for part of the year, but work the rest of the year for an employer without a retirement plan, how much of my earnings may I deduct for a traditional IRA?
The amount you can deduct will be determined by your modified Adjusted Gross Income (AGI) and filing status. For specific information refer to Publication 590 (PDF), Individual Retirement Accounts (IRAs).
References:
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