Generally, amounts distributed by a qualified plan, minus any nondeductible contributions made by the employee over the years, are taxable to the recipient as ordinary income in the year received.
The main exception to taxing distributions from a qualified plan is if you make a tax-free rollover. A rollover is a tax-free transfer of cash or other assets from one retirement account to another if made within 60 days of receipt.
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Did You Know?
Did you know that there is a new automatic (default) rollover rule for qualified retirement plans? The new rule, which was added by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), applies to mandatory distributions of more than $1,000 from a qualified retirement plan made on or after March 28, 2005.
Under the new requirements, mandatory distributions from a retirement plan, including governmental and church plans, must be paid in a direct rollover to an individual retirement plan unless the distributee elects to have the amount rolled over to another retirement plan or to receive the distribution directly. A mandatory distribution is a distribution that is made without the participant's consent and is made to a participant before the participant attains the later of age 62 or normal retirement age. However, a distribution to a surviving spouse or alternate payee does not count as a mandatory distribution.
The plan administrator must notify a distributee in writing when a distribution will be paid in a direct rollover to an IRA. In the meantime, contact your plan administrator if you have any questions about the mechanics of the new automatic rollover provision.
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Pension distributions are subject to federal income tax withholding. The rate of withholding depends on the form of the distribution: periodic payments, nonperiodic payments, lump sum distributions, or rollovers. However, no withholding is required if you make a direct trustee-to-trustee rollover.
Excise (distribution-related penalties) taxes may be required for premature distribution (10 percent penalty), or failure to make minimum distributions (50 percent penalty).