Taxation: Pensions and Annuities FAQs

Internal Revenue Service
  • What is a 401(k) plan ?

  • What is the maximum amount that I can contribute to my 401(k) plan?

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

  • If we cash in a pension plan while in our 30s , when do we pay the taxes and penalties?

  • Since money was withheld from my 401(k) distribution , do I have to include that money as income? Do I pay the 10% early withdrawal fee as well?

  • I withdrew money from my 401(k) plan . What tax forms will I need to fill out?

  • How long do I have to roll over a retirement distribution?

    Q: What is a 401(k) plan?

    A: 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 aren't subject to income tax withholding at the time of deferral. The deferred wages aren't reflected on Form 1040, as they weren't included in taxable wages of box 1, Form W-2. However, they're included as wages subject to social security, Medicare and federal unemployment taxes. The amount an employee can elect to defer this way is limited.

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    Q: What is the maximum amount that I can contribute to my 401(k) plan?

    A: For 2008, the maximum amount anyone can contribute to a 401(k) plan is $15,500 and for those over 50, $5,000 catch-up contribution. 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.

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    Q: I received a lump-sum distribution when I retired. Is there any special tax treatment on lump-sum distribution?

    A: 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 plans of one kind (pension, profit-sharing or stock bonus plans). The distribution must have been made under specific conditions.

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    Q: If we cash in a pension plan while in our 30s, when do we pay the taxes and penalties?

    A: 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 an 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.

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    Q: Since money was withheld from my 401(k) distribution, do I have to include that money as income. Do I pay the 10% early withdrawal fee as well?

    A: 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).

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    Q: I withdrew money from my 401(k) plan. What tax forms will I need to fill out?

    A: 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's reported on line 54 of Form 1040. Depending on 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.

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    Q: How long do I have to roll over a retirement distribution?

    A: 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 issuer making the distribution must give you a written explanation of the rollover.

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