What is 401(k) plan?
A 401(k) plan is a retirement plan in which an employee can elect to have the employer contribute part of the employee's wages to the 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.
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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 and any amount was contributed or allocated by you or your employer to your account, you are considered covered. This is called a defined contribution plan. With this type of plan, it does not matter if you have worked long enough to be vested.
In the other type of plan, the plan administrator decides how much must be invested 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 for this type of plan, either.
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 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs)
- Tax Topic 451, Individual retirement arrangements (IRAs)
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 $75 fee for this service. Publication 939, General Rule for Pension 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.
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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.
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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 Pension and Welfare Benefits Administration (PWBA) of the Department of Labor. To find out which office you are serviced by, contact (202) 219-8776. Alternatively, you may write them at:
U.S. Department of Labor
PWBA
Division of Technical Assistance and Inquiries
Room N-5625
200 Constitution Avenue N. W.
Washington, D.C. 20210
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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.
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What is the maximum amount that I can contribute to my 401(k) plan?
For 2000, the maximum amount anyone can contribute to a 401(k) plan is $10,500. 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.
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What are the 2000 and 2001 limits for elective deferrals to 401(k) plans? What are the limits for other types of pension plans?
Elective deferrals into a section 401(k) plan are limited to $10,500 for 2000 and 2001.
For more information, refer to Notice 99-55 for the 2000 limitation and news release IR- 2000-82 for the 2001 limitation. Refer to Tax Regs in English where you can download Internal Revenue Bulletin 1999-49 which includes Notice 99-55. IR- 2000-82 can be found at our News Releases And Fact Sheets page.
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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 elective deferrals of more than $200 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).
Generally, no more than $10,500 of elective deferrals may be made under a 403(b) program in any tax year. This $10,500 limit operates somewhat like the annual dollar limit on elective deferrals under a cash or deferred arrangement (CODA).
For more information about 403(b) plans, refer to Publication 571, Tax Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations.
References:
- Publication 571, Tax Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations
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.
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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 plans of one kind (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.
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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 will need to pay a 10 percent additional tax on early distributions from qualified retirement plans that is reported on line 53 of Form 1040. You need to complete Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs and attach it to the tax return.
References:
- Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Tax Topic 558, Tax on early distributions from retirement plans
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 1040-ES, Estimated Tax for Individuals, and any 10 percent additional tax on early distributions from qualified retirement plans on Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts, and MSAs.
References:
- Form 1040ES, Estimated Tax for Individuals
- Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts, and MSAs
- 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. In addition, if you took the distribution before reaching age 59 1/2, you will need to pay a 10 percent additional tax on early distributions from qualified retirement plans unless you meet the exceptions in Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs).
References:
- Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs)
- Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- 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 less than 59 1/2 years of age, 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), 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) as well as other plan rules.
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I changed jobs and my old employer sent me a check for my 401(k) money withholding 20% for federal. 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 amount not rolled over is included in gross income and subject to a 10 percent additional tax on early distributions from qualified retirement plans. Use Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs, 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 income this year or owe a 10 percent additional tax on early distributions from qualified retirement plans.
References:
- Publication 590, Individual Retirement Arrangements (IRAs) (Including Roth IRAs and Education IRAs)
- Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- 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 in Publication 560, Retirement Plans for Small Business and Publication 575, Pension and Annuity Income.
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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.
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I received a lump sum distribution from my former employer. 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 55 years of age, you are subject to an additional 10 percent additional tax on early distributions from qualified retirement plans for taking an early distribution. This 10 percent additional tax on early distributions from qualified retirement plans 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 payments, including the 20% identified on your Form 1099-R.
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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 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 54 of Form 1040. Depending 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, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs. Refer to the Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs 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, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- 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. This is reported on line 54 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 54. 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 need to also file Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs.
References:
- Publication 575, Pension and Annuity Income
- Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- Instructions for Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts and MSAs
- 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 qualified retirement plans 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
- the plan you participated in was a 401(k) and not a SIMPLE 401(k)
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.
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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.) 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 11 of Publication 17, Your Federal Income Tax.
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