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.

I received a lump-sum distribution when I retired. Is there any special tax averaging option on a lump-sum distribution?

If you were born before January 2, 1936, or are the beneficiary of a participant born before January 2, 1936, 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 the amount of the distribution 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. Form 5329 (PDF) and instructions and Tax Topic 558 and Tax Topic 412 are available for further guidance.

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. Publication 560 and Publication 575 and Tax Topic 424 and Tax Topic 558 are available for further guidance.

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. Publication 575 and Publication 590 in addition to Tax Topic 412 and Tax Topic 558 and Form 5329 Instructions are available for further guidance.

If I retire or 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? What if I was 55 or older when I separated from service with my employer?

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. You would not have to pay the 10 percent additional tax, for example, if 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. Tax Topic 412 and Tax Topic 558 are available for further guidance.

My understanding is that if I am over age 55 and default on a loan through my 401(k) upon 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. Tax Topic 558, Tax on Early Distributions From Retirement Plans is also available for further guidance.

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 2007-01 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),Publication 17, Your Federal Income Tax and Publication 575, Pensions and Annunity are available for further guidance.

How do I calculate the minimum amount that must be withdrawn from my IRA after age 70 1/2?

You will need to refer to chapter 1 of Publication 590, Individual Retirement Arrangements (IRAs), to find out this amount. Generally the minimum distribution is computed using one of three tables found in Publication 590. Table I is used by beneficiaries. Table II is for use by owners who have spouses who are more than 10 years younger. Table III is generally for use by unmarried owners and owners who have spouses who are not more than 10 years younger.

References:

• Publication 590, Individual Retirement Arrangements (IRAs)

How long do I have to roll over a distribution from a retirement plan to an IRA account?

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 in certain situations, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain a waiver, a request for a ruling must be made including the applicable user fee. Refer to Tax Regs in English to get the Internal Revenue Procedure for requesting a 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 (IRAs).

References:

• Publication 17, Your Federal Income Tax
• Tax Topic 413, Rollovers from Retirement Plans
• Publication 590, Individual Retirement Arrangements (IRAs)