What is 401(k) plan?

A 401(k) plan is arrangement that permits an employee to elect to have the employer contribute part of the employee's cash wages to a retirement plan on a pretax basis. These deferred wages are not subject to income tax withholding at the time of deferral. The deferred wages are not reflected on Form 1040 since they were not included in taxable wages of box 1, Form W-2. However, they are included as wages subject to social security, Medicare and federal unemployment taxes. The amount an employee can elect to defer is limited. The maximum amount of deferral for tax year 2003 is $12,000 for all 401 (K) plans in which the employee participates. Employees age 50 or over may be eligible to make additional catch-up contributions of up to $2,000 in 2003.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business
• Tax Topic 424, 401(k) plans

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. This is called a defined contribution plan if any amount was contributed or allocated by you or your employer to your account, you are considered covered. 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.

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:

• Publication 575, Pensions and Annuity Income.
• Tax Topic 409, Pensions and Annuities.

Will the IRS figure how much of my pension is taxable under the General Rule?

If you cannot use the Simplified Method, you can ask the IRS to figure the tax-free part of your pension under the General Rule. There is a $90 fee for this service. Publication 939, General Rule for Pensions and Annuities, contains a detailed explanation of the information required to be furnished with your request. Also, refer to Tax Topic 411, Pensions - The General Rule and the Simplified Method, for additional information. If your annuity starting date is after November 18, 1996, you generally cannot use the General Rule for annuity payments from a qualified plan.

References:

• Publication 939, General Rule for Pensions and Annuities
• Tax Topic 411, Pensions - The General Rule and the Simplified Method

My 1099-R forms do not show any FICA or Medicare deductions. Do we pay FICA on retirement?

No, you do not pay social security and Medicare taxes on retirement income.

References:

• Publication 15, Circular E, Employer's Tax Guide

I can't get my employer to pay me my pension money. Whom do I contact?

If you cannot get your employer to pay you your pension money, you should contact the Employee Benefits Security Administration (EBSA) of the Department of Labor. To find out which office you are serviced by, contact (866) 275-7922. Alternatively, you may write them at:

References:

• Employee Benefits Security Administration (EBSA)

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

If you receive retirement benefits in the form of pension or annuity payments, the amounts you receive may be fully taxable, or partly taxable in the year received. Refer to Tax Topic 410, Pensions and Annuities, for detailed information, or Publication 575, Pension and Annuity Income. For social security and equivalent railroad retirement benefits, refer to Tax Topic 423 or Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

References:

• Publication 575, Pension and Annuity Income
• Publication 915, Social Security and Equivalent Railroad Retirement Benefits
• Tax Topic 410, Pensions and Annuities
• Tax Topic 423, Social security and equivalent railroad retirement benefits

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

For 2003, the maximum amount an employee can contribute to a 401(k) plan is $12,000 except for catch-up contributions for employees age 50 or over (see the next topic). There are several different limits that apply to a 401(k) plan in addition to the overall contribution limit. The maximum you can contribute will depend on your salary and the type of 401(k) plan to which you are contributing.

The rules for retirement plans are complex. Your plan administrator should have written information about your particular plan that explains these limitations as well as other regulations that apply.

For further information, refer to Tax Topic 424, 401(k) plans.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business
• Tax Topic 424, 401(k) plans

What is the 2003 limit for elective deferrals to 401(k) plans?

Elective deferrals into a section 401(k) plan are limited to $12,000 for 2003, except that employees age 50 or over may be eligible to make an additional contribution of up to $2000 in 2003. SeeTax Topic 424 401(K) plans, for more information.

References:

• Tax Topic 424 401 (k) plans

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 2003 that an employee may make to a 403 (b) plan is $12,000. This maximum limit applies to an employee's aggregate pre-tax contributions to a 403 (b) plan and section 401 (k) plan. This maximum limit will increase by $1,000 each year through 2006. If you have at least 15 years of service with a public school system, hospital, home health service agency, health and welfare agency, church or convention or association of churches (or associated organization), the general limit on elective deferrals may be increased by up to $3,000 (See Publication 571 chapter 4). In addition, employees age 50 or over may be eligible to make catchup contributions of $2000 in 2003 (see Publication 571 chapter 6).

For more information about 403 (b) plans, refer to Publication 571, Tax Sheltered Annuity Plans 403 (b) Plans.

References:

• Publication 571, Tax Sheltered Annuity Plans 403 (b) Plans
• IRS Code Sec. 402(g) (1)

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.

References:

• Publication 575, Pension and Annuity Income
• Tax Topic 412, Lump-sum distributions

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.

References:

• Publication 575, Pension and Annuity Income
• Tax Topic 412, Lump-sum distributions

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.

References:

• Publication 575, Pension and Annuity Income
• Form 5329 (PDF), Additional taxes on Qualified Plans (including IRA's), 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
• Tax Topic 412, Lump-sum distributions

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.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business
• Tax Topic 424, 401(k) plans
• Tax Topic 558, Tax on early distributions from retirement plans

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.

References:

• Publication 590, Individual Retirement Arrangements (IRAs)
• Form 5329 (PDF), Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts
• Instructions for Form 5329, Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

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.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

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:

• Publication 550, Investment Income and Expenses
• Publication 529, Miscellaneous Deductions
• Publication 575, Pension and Annuity Income
• Tax Topic 558, Tax on early distributions from retirement plans

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.

References:

• Publication 575, Pension and Annuity Income
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

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.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business
• Form 5329 (PDF), Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts
• Instructions for Form 5329 , Additional Taxes on Other Qualified Plan (including IRA's), and other tax-favored accounts
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

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..

References:

• Publication 575, Pension and Annuity Income
• Form 5329 (PDF), Additional Taxes on Qualified Plans (including IRA's), 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
• Tax Topic 412, Lump-sum distributions

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:

• Publication 560, Retirement Plans for Small Business
• Publication 575, Pension and Annuity Income
• Tax Topic 558, Tax on early distributions from retirement plans

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).

References:

• Publication 17, Your Federal Income Tax
• Publication 575, Pensions and Annuity.
• Tax Topic 413, Rollovers from Retirement Plans

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:

• Publication 550, Investment Income and Expenses
• Publication 575, Pension and Annuity Income
• Tax Topic 557, Tax on Early Distributions from Traditional and Roth IRA's.

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 .

References:

• Publication 17, Your Federal Income Tax
• Tax Topic 413, Rollovers from Retirement Plans

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:

• Publication 560, Retirement Plans for Small Business (SEP, Simple, and Qualified Plans)
• Publication 575, Pension and Annuity Income
• Publication 590, Individual Retirement Arrangements (IRAs)
• Tax Topic 424, 401(k) plans
• Tax Topic 558, Tax on early distributions from retirement plans
• Tax Topic 412, Lump-sum distributions

Can I take an IRA deduction for the amount I contributed to a 401(k) plan last year?

No. A 401(k) plan is not an IRA. However, the amount you contributed is not included as income in box 1 of your W-2 form so you don't pay tax on it for 2003. For more information, refer to Tax Topic 424, 401(k) Plans, Publication 575, Pension and Annuity Income, or Publication 560, Retirement Plans for Small Business.

References:

• Publication 575, Pension and Annuity Income
• Publication 560, Retirement Plans for Small Business (SEP, Simple, and Qualified Plans)
• Tax Topic 424, 401(k) Plans

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, Individual Retirement Accounts (IRAs).

References:

• Publication 590, Individual Retirement Arrangements (IRAs)
• Tax Topic 451, Individual retirement arrangements (IRAs)