Disaster-related tax relief. Special rules apply to retirement funds received by qualified individuals who suffered an economic loss as a result of:
-
The storms that began on May 4, 2007, in the Kansas disaster area, or
-
The severe storms in the Midwestern disaster areas in 2008.
For more information on these special rules, see Relief for Kansas Disaster Area and Relief for Midwestern Disaster Areas in Publication 575, Pension and Annuity Income.
2010 Roth IRA rollovers. If
you rolled over an amount from a qualified retirement plan to your Roth
IRA in 2010 that you are including in income in
2011 and 2012, see your tax return instructions
and Publication 575 for details on how to report any taxable amount for
2011.
2010 in-plan Roth rollovers. If
you rolled over an amount from your 401(k) or 403(b) plan in 2010 to a
designated Roth account, within the same plan, that
you are including in income in 2011 and 2012,
see your tax return instructions and Publication 575 for details on how
to report
any taxable amount for 2011.
Designated Roth accounts.
A designated Roth account is a
separate account created under a qualified Roth contribution program to
which participants
may elect to have part or all of their elective
deferrals to a 401(k), 403(b), or 457(b) plan designated as Roth
contributions.
Elective deferrals that are designated as Roth
contributions are included in your income. However, qualified
distributions
are not included in your income. See Publication
575 for more information.
In-plan rollovers to designated Roth accounts.
If you are a participant in a
401(k), 403(b), or 457(b) plan, your plan may permit you to roll over
amounts in those
plans to a designated Roth account within the
same plan. The rollover of any untaxed amounts must be included in
income. For
2010 in-plan Roth rollovers, the taxable amount
is included in income in equal amounts in 2011 and 2012 unless you
elected
to include the entire amount in income in 2010.
You may be required to include an amount other than half of a 2010
in-plan
Roth rollover in income in 2011 if you also took
a distribution from your designated Roth account in 2010 or 2011. See
Publication
575 for more information.
More than one program.
If you receive benefits from
more than one program under a single trust or plan of your employer,
such as a pension
plan and a profit-sharing plan, you may have to
figure the taxable part of each pension or annuity contract separately.
Your
former employer or the plan administrator should
be able to tell you if you have more than one pension or annuity
contract.
Section 457 deferred compensation plans.
If
you work for a state or local government or for a tax-exempt
organization, you may be able to participate in a section
457 deferred compensation plan. If your plan is
an eligible plan, you are not taxed currently on pay that is deferred
under
the plan or on any earnings from the plan's
investment of the deferred pay. You are generally taxed on amounts
deferred in
an eligible state or local government plan only
when they are distributed from the plan. You are taxed on amounts
deferred
in an eligible tax-exempt organization plan when
they are distributed or otherwise made available to you.
Starting in 2011, your 457(b)
plan may have a designated Roth account option. If so, you may be able
to roll over
amounts to the designated Roth account or make
contributions. Elective deferrals to a designated Roth account are
included
in your income.
This chapter covers the tax
treatment of benefits under eligible section 457 plans, but it does not
cover the treatment
of deferrals. For information on deferrals under
section 457 plans, see
Retirement Plan Contributions under
Employee Compensation in Publication 525, Taxable and Nontaxable Income.
For general information on these deferred compensation plans, see
Section 457 Deferred Compensation Plans in Publication 575.
Disability pensions.
If you retired on disability,
you generally must include in income any disability pension you receive
under a plan
that is paid for by your employer. You must
report your taxable disability payments as wages on line 7 of Form 1040
or Form
1040A until you reach minimum retirement age.
Minimum retirement age generally is the age at which you can first
receive a
pension or annuity if you are not disabled.
You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on the
credit for the elderly or the disabled, see
chapter 32.
Beginning on the day after you
reach minimum retirement age, payments you receive are taxable as a
pension or annuity.
Report the payments on Form 1040, lines 16a and
16b, or on Form 1040A, lines 12a and 12b.
Disability
payments for injuries incurred as a direct result of a terrorist attack
directed against the United States (or
its allies) are not included in income. For more
information about payments to survivors of terrorist attacks, see
Publication
3920, Tax Relief for Victims of Terrorist
Attacks.
For more information on how to
report disability pensions, including military and certain government
disability pensions,
see
chapter 5.
Retired public safety officers.
An eligible retired public
safety officer can elect to exclude from income distributions of up to
$3,000 made directly
from a government retirement plan to the
provider of accident, health, or long-term disability insurance. See
Insurance Premiums for Retired Public Safety Officers in Publication 575 for more information.
Railroad retirement benefits.
Part of any railroad
retirement benefits you receive is treated for tax purposes as social
security benefits, and
part is treated as an employee pension. For
information about railroad retirement benefits treated as social
security benefits,
see Publication 915, Social Security and
Equivalent Railroad Retirement Benefits. For information about railroad
retirement
benefits treated as an employee pension, see
Railroad Retirement Benefits in Publication 575.
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 tell the payer how much to withhold, or not to withhold, by
filing
Form W-4P. If you choose not to have tax
withheld, or you do not have enough tax withheld, you may have to pay
estimated tax.
If you receive an eligible
rollover distribution, you cannot choose not to have tax withheld.
Generally, 20% will
be withheld, but no tax will be withheld on a
direct rollover of an eligible rollover distribution.
See
Direct rollover option
under
Rollovers, later.
For more information, see
Pensions and Annuities
under
Tax Withholding for 2012 in chapter 4.
Qualified plans for self-employed individuals.
Qualified plans set up by
self-employed individuals are sometimes called Keogh or H.R. 10 plans.
Qualified plans can
be set up by sole proprietors, partnerships (but
not a partner), and corporations. They can cover self-employed persons,
such
as the sole proprietor or partners, as well as
regular (common-law) employees.
Distributions
from a qualified plan are usually fully taxable because most recipients
have no cost basis. 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.
For more information about qualified plans, see
Publication 560, Retirement Plans for Small Business.
Purchased annuities.
If you receive pension or
annuity payments from a privately purchased annuity contract from a
commercial organization,
such as an insurance company, you generally must
use the General Rule to figure the tax-free part of each annuity
payment.
For more information about the General Rule, get
Publication 939. Also, see
Variable Annuities in Publication 575 for the special provisions that apply to these annuity contracts.
Loans.
If you borrow money from your
retirement plan, you must treat the loan as a nonperiodic distribution
from the plan
unless certain exceptions apply. This treatment
also applies to any loan under a contract purchased under your
retirement
plan, and to the value of any part of your
interest in the plan or contract that you pledge or assign. This means
that you
must include in income all or part of the amount
borrowed. Even if you do not have to treat the loan as a nonperiodic
distribution,
you may 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 23.
Tax-free exchange.
No gain or loss is recognized
on an exchange of an annuity contract for another annuity contract if
the insured or
annuitant remains the same. However, if an
annuity contract is exchanged for a life insurance or endowment
contract, any gain
due to interest accumulated on the contract is
ordinary income. See
Transfers of Annuity Contracts in Publication 575 for more information about exchanges of annuity contracts.
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 12a and the taxable part on line 12b. If your pension or annuity
is fully taxable, enter it on line 12b; do not make an entry on line 12a.
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 Form 1040, line 16a, or
Form 1040A, line 12a, and enter the taxable part on Form 1040, line
16b, or
Form 1040A, line 12b. If all the annuities
you receive are fully taxable, enter the total of all of them on Form
1040, line
16b, or Form 1040A, line 12b.
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 Form 1040,
line 16a, or Form 1040A, line 12a, and report the taxable part on Form
1040, line
16b, or Form 1040A, line 12b.
Cost (Investment in the Contract)
Before
you can figure how much, if any, of a distribution from your pension or
annuity plan is taxable, you must determine
your cost (your investment in the contract) in
the pension or annuity. Your total cost in the plan includes the total
premiums,
contributions, or other amounts you paid. This
includes the amounts your employer contributed that were taxable to you
when
paid. Cost does not include any amounts you
deducted or were excluded from your income.
From this total cost, subtract any refunds of
premiums, rebates, dividends, unrepaid loans that were not included in
your
income, or other tax-free amounts that you
received by the later of the annuity starting date or the date on which
you received
your first payment.
Your annuity starting date is the later of the first day of the first period for which you received a payment or the date
the plan's obligations became fixed.
Designated Roth accounts.
Your cost in these accounts is
your designated Roth contributions that were included in your income as
wages subject
to applicable withholding requirements. Your
cost will also include any in-plan Roth rollovers you included in
income.
Foreign employment contributions.
If you worked in a foreign
country and contributions were made to your retirement plan, special
rules apply in determining
your cost. See Publication 575.
Taxation of Periodic Payments
Fully taxable payments.
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 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 pension or annuity, you are not taxed on the part of the pension
or annuity you
receive that represents a return of your cost.
The rest of the amount you receive is generally taxable. You figure the
tax-free
part of the payment using either the Simplified
Method or the General Rule. Your annuity starting date and whether or
not
your plan is qualified determine which method
you must or may use.
If your annuity starting date
is after November 18, 1996, and your payments are from a qualified plan,
you must use
the Simplified Method. Generally, you must use
the General Rule if your annuity is paid under a nonqualified plan, and
you
cannot use this method if your annuity is paid
under a qualified plan.
If you had more than one
partly taxable pension or annuity, figure the tax-free part and the
taxable part of each
separately.
If your annuity is paid under a
qualified plan and your annuity starting date is after July 1, 1986,
and before November
19, 1996, you could have chosen to use either
the General Rule or the Simplified Method.
Exclusion limit.
Your annuity starting date
determines the total amount of annuity payments that you can exclude
from your taxable
income over the years. Once your annuity
starting date is determined, it does not change. If you calculate the
taxable portion
of your annuity payments using the simplified
method worksheet, the annuity starting date determines the recovery
period for
your cost. That recovery period begins on your
annuity starting date and is not affected by the date you first complete
the
worksheet.
Exclusion limited to cost.
If your annuity starting date
is after 1986, the total amount of annuity income that you can exclude
over the years
as a recovery of the cost cannot exceed your
total cost. 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.
Exclusion not limited to cost.
If your annuity starting date
is before 1987, you can continue to take your monthly exclusion for as
long as you receive
your annuity. If you chose a joint and survivor
annuity, your survivor can continue to take the survivor's exclusion
figured
as of the annuity starting date. The total
exclusion may be more than your cost.
Under
the Simplified Method, you figure the tax-free part of each annuity
payment by dividing your cost by the total number
of anticipated monthly payments. For an
annuity that is payable for the lives of the annuitants, this number is
based on the
annuitants' ages on the annuity starting date
and is determined from a table. For any other annuity, this number is
the number
of monthly annuity payments under the
contract.
Who must use the Simplified Method.
You must use the Simplified
Method if your annuity starting date is after November 18, 1996, and
you both:
-
Receive pension or annuity payments from a qualified employee plan, qualified employee annuity, or a tax-sheltered annuity
(403(b)) plan, and
-
On your annuity starting date, you were either under age 75, or entitled to less than 5 years of guaranteed payments.
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 less than 5 years of guaranteed
payments.
Worksheet 10-A. Simplified Method Worksheet for Bill Smith
| 1. |
Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a,
or Form 1040A, line 12a
|
1. |
14,400 |
| 2. |
Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*. See
Cost (Investment in the Contract)
, earlier
|
2. |
31,000 |
|
|
| |
Note: If your annuity starting date wasbefore this year and
you completed this worksheet last year, skip line 3 and enter the
amount from line 4 of last year's worksheet on line
4 below (even if the
amount of your pension or annuity has changed). Otherwise, go to line 3. |
|
|
|
|
| 3. |
Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below
|
3. |
310 |
|
|
| 4. |
Divide line 2 by the number on line 3 |
4. |
100 |
|
|
| 5. |
Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6
|
5. |
1,200 |
|
|
| 6. |
Enter any amounts previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet
for last year
|
6. |
-0- |
|
|
| 7. |
Subtract line 6 from line 2 |
7. |
31,000 |
|
|
| 8. |
Enter the smaller of line 5 or line 7
|
8. |
1,200 |
| 9. |
Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040,
line 16b, or Form 1040A, line 12b
|
9. |
13,200 |
| |
Note: If
your Form 1099-R shows a larger taxable amount, use the amount figured
on this line instead. If you are a retired public
safety officer, see
Insurance Premiums for Retired Public Safety Officers in Publication 575
before entering an amount on
your tax return. |
|
|
| 10. |
Was your annuity starting date before 1987?
□ Yes. STOP. Do not complete the rest of this worksheet.
☑ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2011. You will need this number if you need
to fill out this worksheet next year
|
10. |
1,200 |
| 11. |
Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next
year will generally be fully taxable
|
11. |
29,800 |
| TABLE 1 FOR LINE 3 ABOVE |
| |
AND your annuity starting date was— |
IF the age at annuity
starting date was... |
before November 19,
1996, enter on line 3... |
after November 18,
1996, enter on line 3... |
| 55 or under |
300 |
360 |
| 56–60 |
260 |
310 |
| 61–65 |
240 |
260 |
| 66–70 |
170 |
210 |
| 71 or older |
120 |
160 |
| TABLE 2 FOR LINE 3 ABOVE |
IF the combined ages
at annuity starting
date were... |
|
THEN enter
on line 3... |
| 110 or under |
|
410 |
| 111–120 |
|
360 |
| 121–130 |
|
310 |
| 131–140 |
|
260 |
| 141 or older |
|
210 |
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
How to use the Simplified Method.
Complete the Simplified Method Worksheet in Publication 575 to figure your taxable annuity for 2011.
Single-life annuity.
If your annuity is payable
for your life alone, use Table 1 at the bottom of the worksheet to
determine the total
number of expected monthly payments. Enter on
line 3 the number shown for your age at the annuity starting date.
Multiple-lives annuity.
If your annuity is payable
for the lives of more than one annuitant, use Table 2 at the bottom of
the worksheet to
determine the total number of expected
monthly payments. Enter on line 3 the number shown for the combined ages
of you and
the youngest survivor annuitant at the
annuity starting date.
However, if your annuity
starting date is before 1998, do not use Table 2 and do not combine the
annuitants' ages.
Instead you must use Table 1 and enter on
line 3 the number shown for the primary annuitant's age on the annuity
starting
date.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity next year.
Example.
Bill Smith, age 65, began receiving
retirement benefits in 2011, under a joint and survivor annuity. Bill's
annuity starting
date is January 1, 2011. 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 to
figure his taxable annuity because his payments are from a qualified
plan and he is
under age 75. Because his annuity is
payable over the lives of more than one annuitant, he uses his and
Kathy's combined ages
and Table 2 at the bottom of the
worksheet in completing line 3 of the worksheet. His completed worksheet
is shown in Worksheet
10-A.
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.
The full amount of
any annuity payments received after 310
payments are paid 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 the final income tax return of
the last to die. This deduction is not subject to the 2%-of-adjusted-
gross-income
limit.
Who must use the General Rule.
You must use the General Rule if you receive pension or annuity payments from:
-
A nonqualified plan (such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan), or
-
A qualified plan if you are age 75 or older on your annuity starting date and your annuity payments are guaranteed for at
least 5 years.
Annuity starting before November 19, 1996.
If your annuity starting
date is after July 1, 1986, and before November 19, 1996, you had to use
the General Rule
for either circumstance just described. You
also had to use it for any fixed-period annuity. If you did not have to
use the
General Rule, you could have chosen to use
it. If your annuity starting date is before July 2, 1986, you had to use
the General
Rule unless you could use the Three-Year
Rule.
If you had to use the
General Rule (or chose to use it), you must continue to use it each year
that you recover your
cost.
Who cannot use the General Rule.
You cannot use the General
Rule if you receive your pension or annuity from a qualified plan and
none of the circumstances
described in the preceding discussions apply
to you. See
Who must use the Simplified Method
, earlier.
More information.
For complete information on
using the General Rule, including the actuarial tables you need, see
Publication 939.
Taxation of Nonperiodic Payments
Nonperiodic distributions are also known as
amounts not received as an annuity. They include all payments other than
periodic
payments and corrective distributions. Examples
of nonperiodic payments are cash withdrawals, distributions of current
earnings,
certain loans, and the value of annuity
contracts transferred without full and adequate consideration.
Corrective distributions of excess plan contributions.
Generally, if the
contributions made for you during the year to certain retirement plans
exceed certain limits, the
excess is taxable to you. To correct an excess,
your plan may distribute it to you (along with any income earned on the
excess).
For information on plan contribution limits and
how to report corrective distributions of excess contributions, see
Retirement Plan Contributions under
Employee Compensation in Publication 525.
Figuring the taxable amount of nonperiodic payments.
How you figure the taxable
amount of a nonperiodic distribution depends on whether it is made
before the annuity starting
date or on or after the annuity starting date.
If it is made before the annuity starting date, its tax treatment also
depends
on whether it is made under a qualified or
nonqualified plan and, if it is made under a nonqualified plan, whether
it fully
discharges the contract, is received under
certain life insurance or endowment contracts, or is allocable to an
investment
you made before August 14, 1982.
Annuity starting date.
The annuity starting date is
either the first day of the first period for which you receive an
annuity payment under
the contract or the date on which the obligation
under the contract becomes fixed, whichever is later.
Distribution on or after annuity starting date.
If you receive a nonperiodic
payment from your annuity contract on or after the annuity starting
date, you generally
must include all of the payment in gross income.
Distribution before annuity starting date.
If you receive a nonperiodic
distribution before the annuity starting date from a qualified
retirement plan, you generally
can allocate only part of it to the cost of the
contract. You exclude from your gross income the part that you allocate
to
the cost. You include the remainder in your
gross income.
If you receive a nonperiodic
distribution before the annuity starting date from a plan other than a
qualified retirement
plan, it is allocated first to earnings (the
taxable part) and then to the cost of the contract (the tax-free part).
This
allocation rule applies, for example, to a
commercial annuity contract you bought directly from the issuer.
For more information, see
Figuring the Taxable Amount under
Taxation of Nonperiodic Payments in Publication 575.
This
section on lump-sum distributions only applies if the plan participant
was born before January 2, 1936. If the plan participant
was born after January 1, 1936, the taxable
amount of this nonperiodic payment is reported as discussed earlier.
A lump-sum distribution is the distribution
or payment in one tax year of a plan participant's entire balance from
all of
the employer's qualified plans of one kind
(for example, pension, profit-sharing, or stock bonus plans). A
distribution from
a nonqualified plan (such as a privately
purchased commercial annuity or a section 457 deferred compensation plan
of a state
or local government or tax-exempt
organization) cannot qualify as a lump-sum distribution.
The participant's entire balance from a plan
does not include certain forfeited amounts. It also does not include any
deductible
voluntary employee contributions allowed by
the plan after 1981 and before 1987. For more information about
distributions
that do not qualify as lump-sum
distributions, see Distributions that do not qualify under Lump-Sum Distributions in Publication 575.
If you receive a lump-sum distribution from a
qualified employee plan or qualified employee annuity and the plan
participant
was born before January 2, 1936, you may be
able to elect optional methods of figuring the tax on the distribution.
The part
from active participation in the plan before
1974 may qualify as capital gain subject to a 20% tax rate. The part
from participation
after 1973 (and any part from participation
before 1974 that you do not report as capital gain) is ordinary income.
You may
be able to use the 10-year tax option, discussed later, to figure tax on the ordinary income part.
Use
Form 4972 to figure the separate tax on a lump-sum distribution using
the optional methods. The tax figured on Form 4972
is added to the regular tax figured on your
other income. This may result in a smaller tax than you would pay by
including
the taxable amount of the distribution as
ordinary income in figuring your regular tax.
How to treat the distribution.
If you receive a lump-sum
distribution, you may have the following options for how you treat the
taxable part.
-
Report the part of the
distribution from participation before 1974 as a capital gain (if you
qualify) and the part from participation
after 1973 as ordinary income.
-
Report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year
tax option to figure the tax on the part from participation after 1973 (if you qualify).
-
Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify).
-
Roll over all or part of the distribution. See
Rollovers
, later. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.
-
Report the entire taxable part of the distribution as ordinary income on your tax return.
The first three options are explained in the following discussions.
Electing optional lump-sum treatment.
You can choose to use the
10-year tax option or capital gain treatment only once after 1986 for
any plan participant.
If you make this choice, you cannot use
either of these optional treatments for any future distributions for the
participant.
Taxable and tax-free parts of the distribution.
The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. You may recover
your cost in the lump sum and any net unrealized appreciation (NUA) in employer securities tax free.
Cost.
In general, your cost is the total of:
-
The plan participant's nondeductible contributions to the plan,
-
The plan participant's taxable costs of any life insurance contract distributed,
-
Any employer contributions that were taxable to the plan participant, and
-
Repayments of any loans that were taxable to the plan participant.
You must reduce this cost by amounts previously distributed tax free.
Net unrealized appreciation (NUA).
The NUA in employer
securities (box 6 of Form 1099-R) received as part of a lump-sum
distribution is generally tax
free until you sell or exchange the
securities. (For more information, see
Distributions of employer securities under
Taxation of Nonperiodic Payments in Publication 575.)
Capital
gain treatment applies only to the taxable part of a lump-sum
distribution resulting from participation in the plan
before 1974. The amount treated as capital
gain is taxed at a 20% rate. You can elect this treatment only once for
any plan
participant, and only if the plan
participant was born before January 2, 1936.
Complete Part II of Form 4972 to choose the 20% capital gain election. For more information, see Capital Gain Treatment under Lump-Sum Distributions in Publication 575.
The
10-year tax option is a special formula used to figure a separate tax
on the ordinary income part of a lump-sum distribution.
You pay the tax only once, for the year in
which you receive the distribution, not over the next 10 years. You can
elect this
treatment only once for any plan
participant, and only if the plan participant was born before January 2,
1936.
The ordinary income part of the
distribution is the amount shown in box 2a of the Form 1099-R given to
you by the payer, minus
the amount, if any, shown in box 3. You
also can treat the capital gain part of the distribution (box 3 of Form
1099-R) as
ordinary income for the 10-year tax option
if you do not choose capital gain treatment for that part.
Complete Part III of Form 4972 to choose
the 10-year tax option. You must use the special Tax Rate Schedule shown
in the instructions
for Part III to figure the tax.
Publication 575 illustrates how to complete Form 4972 to figure the
separate tax.
If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer
tax on the distribution by rolling it over to another qualified retirement plan or a traditional IRA.
For this purpose, the following plans are qualified retirement plans.
-
A qualified employee plan.
-
A qualified employee annuity.
-
A tax-sheltered annuity plan (403(b) plan).
-
An eligible state or local government section 457 deferred compensation plan.
Eligible rollover distributions.
Generally, an eligible
rollover distribution is any distribution of all or any part of the
balance to your credit
in a qualified retirement plan. For information
about exceptions to eligible rollover distributions, see Publication
575.
Rollover of nontaxable amounts.
You may be able to roll over
the nontaxable part of a distribution (such as your after-tax
contributions) made to
another qualified retirement plan that is a
qualified employee plan or a 403(b) plan, or to a traditional or Roth
IRA. The
transfer must be made either through a direct
rollover to a qualified plan or 403(b) plan that separately accounts for
the
taxable and nontaxable parts of the rollover or
through a rollover to a traditional or Roth IRA.
If you roll over only part of a
distribution that includes both taxable and nontaxable amounts, the
amount you roll
over is treated as coming first from the taxable
part of the distribution.
Any after-tax contributions
that you roll over into your traditional IRA become part of your basis
(cost) in your
IRAs. To recover your basis when you take
distributions from your IRA, you must complete Form 8606 for the year of
the distribution.
For more information, see the Form 8606
instructions.
Direct rollover option.
You can choose to have any
part or all of an eligible rollover distribution paid directly to
another qualified retirement
plan that accepts rollover distributions or to a
traditional or Roth IRA. If you choose the direct rollover option, or
have
an automatic rollover, no tax will be withheld
from any part of the distribution that is directly paid to the trustee
of the
other plan.
Payment to you option.
If an eligible rollover
distribution is paid to you, 20% generally will be withheld for income
tax. However, the full
amount is treated as distributed to you even
though you actually receive only 80%. You generally must include in
income any
part (including the part withheld) that you do
not roll over within 60 days to another qualified retirement plan or to a
traditional
or Roth IRA. (See
Pensions and Annuities
under
Tax Withholding for 2012 in chapter 4.)
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.
Time for making rollover.
You generally must complete
the rollover of an eligible rollover distribution paid to you by the
60th day following
the day on which you receive the distribution
from your employer's plan. (If an amount distributed to you becomes a
frozen
deposit in a financial institution during the
60-day period after you receive it, the rollover 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 the 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.
The administrator of a
qualified plan must give you a written explanation of your distribution
options within a reasonable
period of time before making an eligible
rollover distribution.
Qualified domestic relations order (QDRO).
You may be able to roll over
tax free all or part of a distribution from a qualified retirement plan
that you receive
under a QDRO. If you receive the distribution as
an employee's spouse or former spouse (not as a nonspousal
beneficiary),
the rollover rules apply to you as if you were
the employee. You can roll over the distribution from the plan into a
traditional
IRA or to another eligible retirement plan. See
Publication 575 for more information on benefits received under a QDRO.
Rollover by surviving spouse.
You may be able to roll over
tax free all or part of a distribution from a qualified retirement plan
you receive as
the surviving spouse of a deceased employee. The
rollover rules apply to you as if you were the employee. You can roll
over
a distribution into a qualified retirement plan
or a traditional or Roth IRA. For a rollover to a Roth IRA, see
Rollovers to Roth IRAs
, later.
A
distribution paid to a beneficiary other than the employee's surviving
spouse is generally not an eligible rollover distribution.
However, see
Rollovers by nonspouse beneficiary next.
Rollovers by nonspouse beneficiary.
If you are a designated
beneficiary (other than a surviving spouse) of a deceased employee, you
may be able to roll
over tax free all or a portion of a distribution
you receive from an eligible retirement plan of the employee. The
distribution
must be a direct trustee-to-trustee transfer to
your traditional or Roth IRA that was set up to receive the
distribution.
The transfer will be treated as an eligible
rollover distribution and the receiving plan will be treated as an
inherited IRA.
For information on inherited IRAs, see
Publication 590, Individual Retirement Arrangements (IRAs).
Retirement bonds.
If you redeem retirement bonds
purchased under a qualified bond purchase plan, you can roll over the
proceeds that
exceed your basis tax free into an IRA (as
discussed in Publication 590) or a qualified employer plan.
Designated Roth accounts.
You can roll over an eligible
rollover distribution from a designated Roth account into another
designated Roth account
or a Roth IRA. If you want to roll over the part
of the distribution that is not included in income, you must make a
direct
rollover of the entire distribution or you can
roll over the entire amount (or any portion) to a Roth IRA. For more
information
on rollovers from designated Roth accounts, see
Publication 575.
In-plan rollovers to designated Roth accounts.
If you are a plan participant
in a 401(k), 403(b), or 457(b) plan, your plan may permit you to roll
over amounts in
those plans to a designated Roth account within
the same plan. The rollover of any untaxed amounts must be included
income.
For 2010 in-plan Roth rollovers, the taxable
amount is included in income in equal amounts in 2011 and 2012 unless
you elected
to include the entire amount in income in 2010.
You may be required to include an amount other than half of a 2010
in-plan
Roth rollover in income in 2011 if you also took
a distribution from your designated Roth account in 2010 or 2011. See
Publication
575 for more information.
Rollovers to Roth IRAs.
You can roll over
distributions directly from a qualified retirement plan (other than a
designated Roth account) to
a Roth IRA.
You must include in your gross
income distributions from a qualified retirement plan (other than a
designated Roth
account) that you would have had to include in
income if you had not rolled them over into a Roth IRA. You do not
include
in gross income any part of a distribution from a
qualified retirement plan that is a return of contributions to the plan
that were taxable to you when paid. In addition,
the 10% tax on early distributions does not apply.
Special rules for 2010 rollovers to Roth IRAs.
If you made a rollover to a
Roth IRA in 2010 and did not elect to include the taxable amount in
income for 2010, you
must include the taxable amount in income for
2011 and 2012.
You may be required to include
an amount other than half of the 2010 rollover from a qualified
employer plan to a
Roth IRA in income for 2011 if you took a Roth
IRA distribution in 2010 or 2011. See Publication 575 for more
information.
More information.
For more information on the rules for rolling over distributions, see Publication 575.
To
discourage the use of pension funds for purposes other than normal
retirement, the law imposes additional taxes on early
distributions of those funds and on failures to
withdraw the funds timely. Ordinarily, you will not be subject to these
taxes
if you roll over all early distributions you
receive, as explained earlier, and begin drawing out the funds at a
normal retirement
age, in reasonable amounts over your life
expectancy. These special additional taxes are the taxes on:
These taxes are discussed in the following sections.
If you must pay either of these taxes, report them on Form 5329. However, you do not have to file Form 5329 if you owe only
the tax on early distributions and your Form 1099-R correctly shows a “1” in box 7. Instead, enter 10% of the taxable part of the distribution on Form 1040, line 58 and write “No” under the heading “Other Taxes” to the left of line 58.
Even
if you do not owe any of these taxes, you may have to complete Form
5329 and attach it to your Form 1040. This applies
if you meet an exception to the tax on early
distributions but box 7 of your Form 1099-R does not indicate an
exception.
Tax on Early Distributions
Most
distributions (both periodic and nonperiodic) from qualified retirement
plans and nonqualified annuity contracts made
to you before you reach age 59½ are subject
to an additional tax of 10%. This tax applies to the part of the
distribution
that you must include in gross income.
For this purpose, a qualified retirement plan is:
-
A qualified employee plan,
-
A qualified employee annuity plan,
-
A tax-sheltered annuity plan, or
-
An eligible state or local
government section 457 deferred compensation plan (to the extent that
any distribution is attributable
to amounts the plan received in a
direct transfer or rollover from one of the other plans listed here or
an IRA).
5% rate on certain early distributions from deferred annuity contracts.
If an early withdrawal from
a deferred annuity is otherwise subject to the 10% additional tax, a 5%
rate may apply
instead. A 5% rate applies to distributions
under a written election providing a specific schedule for the
distribution of
your interest in the contract if, as of March
1, 1986, you had begun receiving payments under the election. On line 4
of Form
5329, multiply the line 3 amount by 5%
instead of 10%. Attach an explanation to your return.
Distributions from Roth IRAs allocable to a rollover from an eligible retirement plan within the 5-year period.
If, within the 5-year
period starting with the first day of your tax year in which you rolled
over an amount from
an eligible retirement plan to a Roth IRA,
you take a distribution from the Roth IRA, you may have to pay the
additional 10%
tax on early distributions. You generally
must pay the 10% additional tax on any amount attributable to the part
of the rollover
that you had to include in income. The
additional tax is figured on Form 5329. For more information, see Form
5329 and its
instructions. For information on qualified
distributions from Roth IRAs, see
Additional Tax on Early Distributions in chapter 2 of Publication 590.
Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period.
If, within the 5-year
period starting with the first day of your tax year in which you rolled
over an amount from
a 401(k), 403(b), or 457(b) plan to a
designated Roth account, you take a distribution from the designated
Roth account, you
may have to pay the additional 10% tax on
early distributions. You generally must pay the 10% additional tax on
any amount
attributable to the part of the in-plan
rollover that you had to include in income. The additional tax is
figured on Form
5329. For more information, see Form 5329 and
its instructions. For information on qualified distributions from
designated
Roth accounts, see
Designated Roth accounts under
Taxation of Periodic Payments in Publication 575.
Exceptions to tax.
Certain early distributions are excepted from the early distribution tax. If the payer knows that an exception applies to
your early distribution, distribution code “
2,”
“
3,” or “
4” should be shown in box 7 of your Form 1099-R and you do not have to report the distribution on Form 5329. If an exception
applies but distribution code “
1”
(early distribution, no known exception) is shown in box 7, you must
file Form 5329. Enter the taxable amount of the distribution
shown in box 2a of your Form 1099-R on line 1
of Form 5329. On line 2, enter the amount that can be excluded and the
exception
number shown in the Form 5329 instructions.
If distribution code “
1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution
on Form 5329. Enter exception number “
12” on line 2.
General exceptions.
The tax does not apply to distributions that are:
-
Made as part of a series of
substantially equal periodic payments (made at least annually) for your
life (or life expectancy)
or the joint lives (or joint life
expectancies) of you and your designated beneficiary (if from a
qualified retirement plan,
the payments must begin after
your separation from service),
-
Made because you are totally and permanently disabled, or
-
Made on or after the death of the plan participant or contract holder.
Additional exceptions for qualified retirement plans.
The tax does not apply to distributions that are:
-
From a qualified retirement plan (other than an IRA) after your separation from service in or after the year you reached age
55 (age 50 for qualified public safety employees),
-
From a qualified retirement plan (other than an IRA) to an alternate payee under a qualified domestic relations order,
-
From a qualified retirement plan to the extent you have deductible medical expenses (medical expenses that exceed 7.5% of
your adjusted gross income), whether or not you itemize your deductions for the year,
-
From an employer plan under a
written election that provides a specific schedule for distribution of
your entire interest
if, as of March 1, 1986, you had
separated from service and had begun receiving payments under the
election,
-
From an employee stock ownership plan for dividends on employer securities held by the plan,
-
From a qualified retirement plan due to an IRS levy of the plan, or
-
From elective deferral accounts under 401(k) or 403(b) plans or similar arrangements that are qualified reservist distributions.
Qualified public safety employees.
If you are a qualified
public safety employee, distributions made from a governmental defined
benefit pension plan
are not subject to the additional tax on
early distributions. You are a qualified public safety employee if you
provide police
protection, firefighting services, or
emergency medical services for a state or municipality, and you
separated from service
in or after the year you attained age 50.
Qualified reservist distributions.
A qualified reservist
distribution is not subject to the additional tax on early
distributions. A qualified reservist
distribution is a distribution (a) from
elective deferrals under a section 401(k) or 403(b) plan, or a similar
arrangement,
(b) to an individual ordered or called to
active duty (because he or she is a member of a reserve component) for a
period
of more than 179 days or for an indefinite
period, and (c) made during the period beginning on the date of the
order or call
and ending at the close of the active duty
period. You must have been ordered or called to active duty after
September 11,
2001. For more information, see Publication
575.
Additional exceptions for nonqualified annuity contracts.
The tax does not apply to distributions from:
-
A deferred annuity contract to the extent allocable to investment in the contract before August 14, 1982,
-
A deferred annuity contract under a qualified personal injury settlement,
-
A deferred annuity contract purchased by your employer upon termination of a qualified employee plan or qualified employee
annuity plan and held by your employer until your separation from service, or
-
An immediate annuity contract (a single premium contract providing substantially equal annuity payments that start within
1 year from the date of purchase and are paid at least annually).
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 retirement plans must begin no later than your
required beginning
date (defined later). The payments each year
cannot be less than the required minimum distribution.
Required distributions not made.
If the actual distributions
to you in any year are less than the minimum required distribution for
that year, you
are subject to an additional tax. The tax
equals 50% of the part of the required minimum distribution that was not
distributed.
For this purpose, a qualified retirement plan includes:
-
A qualified employee plan,
-
A qualified employee annuity plan,
-
An eligible section 457 deferred compensation plan, or
-
A tax-sheltered annuity plan (403(b) plan)(for benefits accruing after 1986).
Waiver.
The tax may be waived if
you establish that the shortfall in distributions was due to reasonable
error and that reasonable
steps are being taken to remedy the
shortfall. See the instructions for Form 5329 for the procedure to
follow if you believe
you qualify for a waiver of this tax.
State insurer delinquency proceedings.
You might not receive the
minimum distribution because assets are invested in a contract issued by
an insurance company
in state insurer delinquency proceedings. 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 50% excise tax.
Required beginning date.
Unless the rule for 5%
owners applies, you generally must begin to receive distributions from
your qualified retirement
plan by April 1 of the year that follows the
later of:
-
The calendar year in which you reach age 70½, or
-
The calendar year in which you retire from employment with the employer maintaining the plan.
However, your plan may require you to begin to receive distributions by April 1 of the year that follows the year in which
you reach age 70½, even if you have not retired.
If you reached age 70½ in
2011, you may be required to receive your first distribution by April 1,
2012. Your required
distribution then must be made for 2012 by
December 31, 2012.
5% owners.
If you are a 5% owner, you
must begin to receive distributions by April 1 of the year that follows
the calendar year
in which you reach age 70½.
Age 70½.
You reach age 70½ 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 June 30, 2011, you were age 70½ on
December 30, 2011.
If your 70th birthday was on July 1, 2011,
you reached age 70½ on January 1, 2012.
Required distributions.
By the required beginning date, as explained earlier, you must either:
-
Receive your entire interest in the plan (for a tax-sheltered annuity, your entire benefit accruing after 1986), or
-
Begin receiving periodic
distributions in annual amounts calculated to distribute your entire
interest (for a tax-sheltered
annuity, your entire benefit
accruing after 1986) over your life or life expectancy or over the joint
lives or joint life
expectancies of you and a
designated beneficiary (or over a shorter period).
Additional information.
For more information on this rule, see
Tax on Excess Accumulation in Publication 575.
Form 5329.
You must file Form 5329 if
you owe tax because you did not receive a minimum required distribution
from your qualified
retirement plan.
Survivors and Beneficiaries
Generally, a survivor or beneficiary reports pension or annuity income in the same way the plan participant would have. However,
some special rules apply.
Survivors of employees.
If you are entitled to receive
a survivor annuity on the death of an employee who died before becoming
entitled to
any annuity payments, you can exclude part of
each annuity payment as a tax-free recovery of the employee's investment
in
the contract. You must figure the taxable and
tax-free parts of your annuity payments using the method that applies as
if
you were the employee.
Survivors of retirees.
If you receive benefits as a
survivor under a joint and survivor annuity, include those benefits in
income in the
same way the retiree would have included them in
income. If you receive a survivor annuity because of the death of a
retiree
who had reported the annuity under the
Three-Year Rule and recovered all of the cost tax free, your survivor
payments are
fully taxable.
If
the retiree was reporting the annuity payments under the General Rule,
you must apply the same exclusion percentage to
your initial survivor annuity 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 was reporting the annuity payments under the Simplified
Method, the part of each payment that is tax free is
the same as the tax-free amount figured by the
retiree at the annuity starting date. This amount remains fixed even if
the
annuity payments are increased or decreased. See
Simplified Method
, earlier.
In any case, if the annuity
starting date is after 1986, the total exclusion over the years cannot
be more than the
cost.
Estate tax deduction.
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 the part of the
total estate tax that was based on the annuity. The deceased annuitant
must
have died after the annuity starting date. (For
details, see section 1.691(d)-1 of the regulations.) Deduct it in equal
amounts
over your remaining life expectancy.
If the decedent died before
the annuity starting date of a deferred annuity contract and you receive
a death benefit
under that contract, the amount you receive
(either in a lump sum or as periodic payments) in excess of the
decedent's cost
is included in your gross income as income in
respect of a decedent for which you may be able to claim an estate tax
deduction.
You can take the estate tax
deduction as an itemized deduction on Schedule A, Form 1040. This
deduction is not subject
to the 2%-of-adjusted-gross-income limit on
miscellaneous deductions. See Publication 559, Survivors, Executors, and
Administrators,
for more information on the estate tax
deduction.
