Frequently Asked Tax Questions
Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.) - General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans
Rev. date: 1/1/2011
The answer to this question depends on the 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.
If you are eligible for a 401(k) plan you are considered covered, even if you choose not to make contributions.
It does not matter if you have worked long enough to be vested in employer contributions (you are always immediately vested in your own contributions).
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.
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 not vested in your benefits.
The Form W-2
(PDF) you receive from your employer has a box used to indicate whether you were covered for the year. The "Retirement Plan" box should be checked if you were covered in a plan sponsored by the employer.
Rev. date: 1/1/2011
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.
Generally, your pension or annuity is usually fully taxable:
If your employer contributed all of the cost without including the cost in your taxable wages, or
If you got back all of your previously taxed contributions tax free in previous years.
Generally, your pension or annuity will be partially taxable:
If you receive pension or annuity payments before age 59-1/2, you may be subject to an additional 10% tax on early distributions. See Publication 575.
Note: If you contributed after-tax dollars in the form of designated Roth contributions to a 401(k) plan that permits such contributions, these contributions would be fully taxable in the year of contributions, although qualified distributions from the designated Roth account would not be taxed when received.
Rev. date: 12/16/2010
The rules for retirement plans are complex. Your plan administrator should have written information about your particular plan that explains the limitations imposed by law as well as other limitations that apply under the plan:
The maximum amount an employee can contribute to a 401(k) plan under the law is set each year.
If you are age 50 or older, you may be allowed to make additional contributions (commonly referred to as catch-up contributions) in excess of the normally applicable annual limit.
The maximum amount applies to an employee's aggregate pre-tax contributions and designated Roth 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 other limits, your salary, the type of 401(k) plan to which you are contributing, as well as the terms of the plan, may result in the maximum amount that you can contribute to a 401(k) plan to be less than the otherwise applicable legal limit.
Rev. date: 9/16/2010
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. If you were born on or before January 1, 1936, or are the beneficiary of a participant born on or before January 1, 1936, you may be able to able to elect optional methods of figuring the tax on lump-sum distributions you received from an eligible retirement plan. These optional methods can be elected only once after 1986.
For other situations and further information, see Publication 575, Pension and Annuity Income.
Rev. date: 8/30/2010
Generally, the exception for using retirement funds in an individual retirement plan to build or purchase your first home does not apply to a distribution of your elective deferrals from a 401(k) plan.
Elective deferrals to a 401(k) plan are subject to certain distribution restrictions. See Publication 560 Retirement Plans for Small Business, Publication 575 Pension and Annuity Income and Tax Topic 424 401(k) plans.
If you are under the age of 59 1/2, a distribution (including a distribution of employer matching and profit sharing contributions) from your 401(k) plan is generally subject to a 10% additional tax on early distributions. There may be special rules, for example, if the distribution is from a designated Roth account or after you reach age 55 and separate from service. This 10% additional tax is in addition to other taxes that apply to the distribution.
- Your plan administrator or employer should have written information about your particular plan (including the availability of loans or hardship distributions and applicable requirements) as well as other plan rules.
Rev. date: 8/30/2010
If the amount rolled over was the net amount (the amount of the distribution less the tax withheld):
If the amount rolled over was the gross amount (the amount rolled over included the 20% that was withheld):
You would not include the amount rolled over in gross taxable income for the year.
In addition, you would not owe a 10% additional tax on early distributions.
Rev. date: 1/28/2011
Generally, unless an exception applies, a distribution of your benefits from a 401(k) plan before age 59 ½ is subject to the 10% additional tax on early distributions from retirement plans. See Publication 575
, Pension and Annuity Income.
However, there are special rules that apply to earlier distributions. For example, a distribution from a 401(k) plan that is made after separation from service and age and in in each year after you reach 55 is not subject to the 10% tax.
Rev. date: 8/31/2010
If you default on a loan from your 401(k) plan:
For example, the 10% additional tax on early distributions does not apply if all the following apply to you:
You received the distribution after you left your employer; and
Your departure from the employer occurs during or after the calendar year in which you reached age 55; and
Your departure from the employer qualifies as a separation from service.
There are a number of exceptions to the 10% additional tax on early distributions. You may wish to refer to Instructions for Form 5329
, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Publication 575
, Pension and Annuity Income, and Publication 560
, Retirement Plans for Small Business, for additional information.