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.
References:
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.
References:
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
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