Tax Tips
Retirement Plan Distribution Information- April 2001
Richard Scrivanich - Partner
The tax treatment of amounts you receive from different types of retirement plans (such as individual retirement accounts-IRAs, employee pensions or annuities, and disability pensions or annuities) can vary depending on when you receive the amounts and the type of retirement plan. It's important to know the rules regarding distributions so you can plan your distributions and rollovers and avoid unnecessary taxes and penalties.
Distributions from IRAs.
Generally, you must include in your gross income distributions from a traditional IRA in the year you receive them. A traditional IRA is any IRA that is not a Roth, SIMPLE, or education IRA. (Exceptions to the general rule are rollovers, tax-free withdrawals or contributions, and the return of nondeductible contributions).
Premature distributions.
Generally, premature distributions (early withdrawals) are amounts you withdraw from your traditional IRA account or annuity before you are age 59½, or amounts you receive when you cash in retirement bonds before you are age 59½. You must include premature distributions of taxable amounts in your gross income. These taxable amounts are also subject to an additional 10% tax unless the distributions qualify for an exception.
Distributions after age 59½ and before 70½.
After you reach age 59½, you can withdraw assets from your traditional IRA without having to pay the 10% additional tax. Even though you can make withdrawals, you don't have to withdraw any assets from your IRA until you reach 70½.
Required distributions.
If you are the owner of a traditional IRA, you must withdraw the entire balance or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 70½. If distributions from your traditional IRA are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed.
Other types of distributions - Lump-sum distributions.
If you receive a lump-sum distribution from a qualified retirement plan (a qualified employee plan or qualified employee annuity), you may be able to choose from different methods to calculate the tax on the distribution.
Early distributions.
Most distributions you receive from your qualified retirement plan or deferred annuity contract before you reach age 59½ are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution. For this purpose, a qualified retirement plan is: 1) a qualified employee plan, 2) a qualified employee annuity plan, 3) a tax-sheltered annuity plan for employees of public schools or tax-exempt organizations, or 4) an IRA (other than an education IRA).
Exceptions:
The early distribution tax does not apply if the distribution is:
- Made as part of a series of substantially equal periodic payments (made at least annually) for your life or joints lives of you and your beneficiary (or life or joint life expectancy).
- Made because you are totally and permanently disabled.
- Made on or after the death of the plan participant or contract holder.
- From a qualified retirement plan other than an IRA; the exception applies only if payments begin after your separation from service.
- From a qualified retirement plan to the extent you have deductible medical expenses (those that exceed 7.5% of your adjusted gross income), whether or not you itemize your deductions for the year.
- 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.
- From an IRA for health insurance premiums if you are unemployed.
- From an IRA to the extent of your higher education expenses.
- From an IRA for a first home purchase.
Distributions from SIMPLE IRAs.
An early withdrawal from a SIMPLE IRA is generally subject to the additional 10% tax. However, if the distribution is made within the first two years of participation in the SIMPLE plan, the additional tax is 25%.
Distributions from annuity contracts.
An early withdrawal from a deferred annuity may be subject to the 10% additional tax, or 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.
Tax on excess accumulation.
The IRS wants to make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, and therefore may impose a tax on "excess accumulation." Therefore, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. (Unless the rule for 5% owners and IRAs applies.) This is April 1 of the year that follows the later of: 1) the calendar year in which you reach age 70½, or 2) the calendar year in which you retire.
These are just some of the rules regarding retirement plan distributions. Although these rules are extensive and sometimes confusing, remember that they do exist and that there are many factors involved. Age, the amount of the distribution, and the type of plan are all factors you should consider prior to making contributions and taking distributions, as they could affect your taxes.
If you have any questions concerning taking a distribution from your IRA or other qualified retirement plan, please feel free to call me at (562) 698-9891.
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