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Keyword: Lump-Sum Distribution

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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, Pension and Annuity Income.

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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 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, Pension and Annuity Income.

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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 may need to pay a 10 percent additional tax on early distributions from qualified retirement plans that is reported on line 57 of Form 1040. The early distribution tax does not apply to any distribution that meets the criteria for one of several exceptions (seePublication 575 , "Tax on Early Distribution"). 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
  • Publication 557 , Pension and Annuity Income

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, Tax Withholding and Estimated Tax
  • Tax Topic 451, Individual retirement arrangements (IRAs)
  • Tax Topic 558, Tax on early distributions from retirement plans

Since money was withheld from my 401(k) distribution, do I have to include that money as income and do I pay the 10% early withdrawal fee as well?

Yes, you need to include in income the total amount of your 401(k) distribution reported on Form 1099R (PDF), Distributions From Pensions, Annuities, Retirement on Profit-Sharing Plans, IRAs Insurance Contracts, etc.. In addition, if you took the distribution, you will need to pay a 10 percent additional tax on early distributions from qualified retirement plans unless you meet the exceptions in Publication 575, Pension and Annuity Income.

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Can I withdraw funds penalty free from my 401(k) plan to purchase my first home?

If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10 percent additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules.

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I changed jobs and my old employer sent me a check for my 401(k) money withholding 20% for Federal Income Tax. I rolled over the distribution to my 401(k) plan at my current employer within 60 days. Since money was withheld from the 401(k) distribution, do I have to include that money as income?

If the amount rolled over was the net amount, that is, the amount of the distribution less the tax withheld, then the 20% withholding amount not rolled over is included in gross taxable income and may be subject to a 10 percent additional tax on early distributions from qualified retirement plans. Use Form 5329 (PDF), Additional Taxes on Other Qualified Plans (including IRA's), and other tax-favored accounts, to report the penalty.

If the amount rolled over was the gross amount, that is, you added an amount equal to the withholding to the amount that was rolled over, you would not add any of that amount to gross taxable income this year or owe a 10 percent additional tax on early distributions from qualified retirement plans.

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If I retire or am laid off before I am 59 1/2, can I withdraw the funds accumulated in a qualified employee profit sharing plan, 401(k), without having to pay a 10% penalty?

In most cases, if you withdraw funds from your 401(k) before you are 59 1/2, you must pay the 10 percent additional tax on early distributions from qualified retirement plans on any amounts that are not rolled into an IRA. However, there are some exceptions listed in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.

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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.

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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 59 1/2 years of age, you may be subject to an additional 10 percent tax on early distribution unless you meet the exceptions in Publication 575, Pension and Annuity Income. 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.

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I withdrew money from my 401(k) plan. What tax forms will I need to fill out?

You will need to file a Form 1040 and show the amount of distribution from your 401(k) plan on lines 16a and/or 16b. If you took a distribution prior to 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 57 of Form 1040 unless you qualify for one of the exceptions discussed inPublication 575, Pension and Annuity Income. Depending upon how the distribution on your Form 1099-R is coded (refer to box 7 of the form), you may also need to complete Form 5329 (PDF), Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts. Refer to the Instructions for Form 5329 , Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts to determine if you need to file Form 5329.

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5.4 Pensions and Annuities: Loans & Other Retirement Account Transactions


I left a company where I had an outstanding loan through my 401(k) and did not pay the loan back. How do I report this on my Form 1040?

You should receive a Form 1099-R reporting the outstanding loan as a distribution from the 401(k) plan. This income is reported as ordinary income on line 16b of Form 1040. If you are under the age of 59 1/2, you are also subject to a 10 percent additional tax on early distributions from qualified retirement plans unless you qualify for an exception listed in Publication 575, Pension and Annuity Income. This 10% additional tax is reported on line 57 of Form 1040. If you are subject to the 10 percent additional tax on early distributions from qualified retirement plans and the Form 1099-R has code 1 in Box 7, write "no" on the dotted line next to line 57. If you are subject to the 10 percent additional tax on early distributions from qualified retirement plans and the Form 1099-R does not have code 1 in Box 7, you also need to file Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), and other tax-favored accounts..

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My understanding is that if I am over age 55 and default on a loan through my 401(k) when leaving the company, the 10% penalty is forgiven. Can you confirm that for me?

If you default on a loan from your 401(k), you are considered to have received a distribution from your 401(k). Whether or not you will have to pay the 10 percent additional tax on early distributions from 401 (K) plan depends on a number of factors, including your age.

In order to avoid the 10 percent additional tax on early distributions from qualified retirement plans, the following all must be true:

  • you received the distribution after you left the company
  • you left the company during or after the calendar year in which you reached age 55
  • your departure from the company qualifies as a separation from service
    • or, you must meet one of the other exceptions shown in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.

    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). The IRS may waive the 60 day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain the waiver in most cases, A request for a letter ruling must be made. A user fee of $90.00 will apply see Revenue Procedure 2003-16 (within IRS Bulletin 2003-4) . 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 , Individual Retirement Arrangements (IRA's).

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    9.4 Estimated Tax: Large Gains, Lump-sum Distributions, etc.


    I received a lump-sum distribution from a retirement account, but no taxes were withheld. How do I determine whether estimated taxes should be paid?

    You should obtain Form 1040ES (PDF), Estimated Tax for Individuals , to help you figure your estimated tax liability. Since this situation involves a lump-sum distribution, you may qualify for the ten-year tax option. Lump-sum distributions must meet specific requirements to qualify for optional tax treatment. Thus, you may also need Form 4972 (PDF) , Tax on Lump-Sum Distributions , to make an accurate estimate of your income tax liability.

    References:

    17.1 Individual Retirement Arrangements (IRAs): Distributions, Early Withdrawals, 10% Additional Tax


    If we cash in an IRA account 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 IRA. Since you took the withdrawal before reaching age 59 1/2, unless you meet certain exceptions listed in Publication 590, Individual Retirement Arrangements (IRAs), you will need to pay an additional 10 percent tax on early distributions from qualified retirement plans that is reported on line 57 of Form 1040. You may need to complete Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, and attach it to the tax return, if required. If you ever made nondeductible contributions to your IRA, you must complete Form 8606 (PDF), Nondeductible IRAs and Coverdell ESA's attach it to your return. Form 8606 is used to determine if the total amount of your distribution is tax free.

    References:

    • Publication 590, Individual Retirement Arrangements (IRAs)
    • Form 5329 (PDF), Additional Taxes On Qualified Plans (Including IRAs), and Other Tax-Favored Accounts
    • Instructions for Form 5329, Additional Taxes On Qualified Plans (Including IRAs), and Other Tax-Favored Accounts
    • Tax Topic 451, Individual Retirement Arrangements (IRAs)
    • Tax Topic 557, Tax on Early Distributions from Traditional and Roth IRA's.
    • Form 8606 (PDF), Nondeductible IRSs and Coverdell ESA's

    If we cash in an IRA account 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 additional 10 percent 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. Any 10 percent additional tax would go on Form 1040ES line 12 "other taxes," when completing the worksheet.

    References:

    • Form 1040ES (PDF), Estimated Tax for Individuals
    • Form 5329 (PDF), Additional Taxes On Qualified Plans (Including IRA's) and Other Tax-Favored Accounts
    • Publication 505, Tax Withholding and Estimated Tax
    • Tax Topic 451, Individual Retirement Arrangements (IRAs)
    • Tax Topic 557, Tax on Early Distribution from Traditional and Roth IRA's.

    Can the 10% penalty for an early withdrawal from an IRA be deducted in the Adjusted Gross Income section of Form 1040 as a penalty on early withdrawal of savings?

    No, the additional 10 percent tax on early distributions from qualified retirement plans you pay for a premature withdrawal of an IRA does not qualify as a penalty for withdrawal of a savings account.

    References:

    17.2 Individual Retirement Arrangements (IRAs): Rollovers


    How long do I have to roll over a distribution from a retirement plan to an IRA account?

    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.) The IRS may waive the 60 day requirement in certain situations, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain a waiver, a request for a ruling must be made and a user fee of $90.00 will apply, See Revenue Procedure 2003-16 (within IRS Bulletin 2003-4). 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 Publication 590 Individual Retirement Arrangement .

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    If I can't withdraw funds penalty free from my 401(k) plan to purchase my first home, can I roll it over into an IRA and then withdraw that money to use as my down payment?

    Yes, if you are receiving a distribution from a 401(k) that is eligible to roll over into a IRA and you meet all of the qualifications for an IRA distribution for a first-time homebuyer. Your plan administrator is required to notify you before making a distribution from your 401(k) plan whether that distribution is eligible to be rolled over into an IRA. To see if you qualify for a distribution to be used as a first-time homebuyer, refer to Publication 590, Individual Retirement Arrangements (IRAs) .

    References:

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