Pensions and Annuities: General
This is archived information that pertains only to the 2005 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. Generally,
if your employer's plan has a separate account for each employee, it is 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, a defined benefit plan, the employer must make
enough contributions (together with earnings) to provide the retirement benefit
promised in the retirement 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. It does not matter if you are vested.
The Form W-2 (PDF) 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.
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.
What is the maximum amount that I can contribute to my 401(k) plan?
The maximum amount an employee can contribute to a 401(k) plan is determined
annually. You may be allowed catch up contributions in addition to annual
limit, if you are age 50 or older. Refer to "Elective Deferrals" in Publication 525 Taxable and Nontaxable Income. The maximum
amount applies to an employee's aggregate pre-tax contributions to a 401(k)
plan and 403(b) plan. There are several different limits that apply to a 401(k)
plan in addition to the overall contribution limit. These limits, your salary
and the type of 401(k) plan to which you are contributing may limit your 401(k)
contributions to a lesser amount.
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.
I received a lump-sum distribution when I retired. Is there any
special tax treatment on a 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 employee's 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.
If taxes are 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 1099-R (PDF) ,Distributions
From Pensions, Annuities, Retirement on Profit-Sharing Plans, IRAs Insurance
Contracts, etc. In addition, if the distribution occurs before you are
age 59 1/2, you may need to pay a 10 percent additional tax on early distributions
from qualified retirement plans unless you meet one of the exceptions in Publication 575, Pension and Annuity Income. You will include
the federal income tax withheld on the appropriate line of your federal tax
return along with any other federal income tax.
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) plan 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.
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.
If I retire or am laid off before I am 59 1/2, can I withdraw the
funds accumulated in a 401(k) plan, without having to pay a 10% penalty?
In most cases, if you withdraw funds from your 401(k) plan 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.
My understanding is that if I am over age 55 and default on a loan
through my 401(k) plan 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) plan, you are considered to have
received a distribution from your 401(k) plan . 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; and
- you left the company during or after the calendar year in which you reached
age 55; and
- your departure from the company qualifies as a separation from service.
In addition, you may avoid the 10 percent additional tax if you meet
one of the other exceptions shown in Publication 560, Retirement Plans
for Small Business and Publication 575, Pension and Annuity
Income.
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 which include the applicable user
fee. Refer to Internal
Revenue Bulletin 2006-01 to get the Internal Revenue Procedure for requesting
a letter ruling. 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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