Jackson Hewitt® is here to help you understand complex tax laws so you can be better informed and take full advantage of tax law provisions.
These topics explore some of the more important aspects of complicated tax laws, in a manner that is understandable and concise.
Pension plans are set up and maintained through your employer. Your employer sets up a plan based on strict IRS guidelines and offers the plan to each of its employees. There are many types of plans available. The most common types of plans are as follows:
For more information about pensions, read more below:
If you make eligible contributions to a qualified retirement plan, an eligible deferred compensation plan, or an IRA, you may qualify for the Retirement Savings Contributions Credit. The maximum credit is $2,000 ($4,000 if Married Filing Jointly).
Certain restrictions apply:
This credit is in addition to any deduction or exclusion for the plan contribution. Use Form 8880, Credit for Qualified Retirement Savings Contributions, to calculate this credit.
When you begin receiving periodic payments or distributions from your pension plan, you must determine whether the full amount you receive is taxable to you. If you have no cost in your pension plan, your payments are fully taxable. Generally, you have no cost in your plan if:
However, if you have a cost to recover from your pension plan, you can exclude part of each distribution payment from income as a recovery of your cost. Generally, you can recover the cost of your pension tax free over the period you are to receive the payments. This tax-free part of the
payment is determined when your payments start and remains the same each year, even if the payment amount changes. The amount of each payment that is more than the tax-free part is taxable.
Generally, your plan administrator will have calculated the tax-free portion of your annual distribution and reported it correctly on Form 1099-R. If you must calculate the tax-free part of the payment, you can usually use the simplified method. You must use the
general rule if your payments are from a nonqualified plan.
You determine which method to use when you begin receiving your payments, and you continue using the same method each year that you recover part of your cost.
You can transfer funds from your qualified retirement plan to an IRA or other qualified plan within 60 days of receiving a distribution without paying any income tax. The opportunity to roll over pension plan funds into alternate plans or an IRA is an ideal way for an
employee who leaves their job to avoid the tax liability assessed when the plan is terminated and a distribution check is issued. The rollover is a tax benefit that eliminates the payment of taxes on a distribution made for any reason other than a regular retirement distribution. Retirement plan
administrators/trustees are required by law to permit a transfer of funds from their retirement plan directly to another qualified plan. This is known as a "trustee-to-trustee"transfer. The law favors the "trustee-to-trustee" transfer and discourages "hand check" distributions, a distribution check made payable
directly to the plan beneficiary, by requiring plans to withhold 20% of the distribution before a check is issued. Therefore, a check will be issued for only 80% of the total amount distributed. This can be a "tax trap" for those who want to roll over a distribution but do not have the funds available equal
to the amount withheld. The 20% withheld needs to be replaced from other sources and included as part of the rollover within the 60-day period or the 20% will be considered to have been distributed and subject to taxes.
The IRS may waive the 60-day requirement for rollovers from pensions if you have
suffered from a casualty, disaster, or other event beyond your reasonable control that prevents you from meeting the 60-day rule.
To discourage the use of pension funds for purposes other than normal retirement, the law imposes additional taxes on early distributions of those funds. Generally, if you receive distributions from your pension plan before reaching age 59 and one half, you will be subject to a 10% additional
tax on the part you must include in your gross income unless you meet one of the exceptions. Some exceptions to the additional tax are:
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