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Pension Evaluation
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Tax Treatment in Pension Evaluation
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At Pension Evaluators® at Troyan, Inc.® you can trust our experience providing reliable, professional and timely pension evaluations. We have pioneered the pension evaluation field and become the industry leader in defined benefit and defined contribution plan pension evaluations for marital dissolution actions and retiree verification calculations. Our mission is to provide prompt, accurate answers to complex economic issues at an affordable price.

Techniques - Tax haven deferral QDRO Defined Contribution Plan / IRA

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Tax Treatment and deferrals.

10-Year Tax Option

The 10-year tax option is a special formula used to figure a separate tax on the ordinary income part of a lump-sum distribution. You pay the tax only once, for the year in which you receive the distribution, not over the next 10 years. You can elect this treatment only once for any plan participant, and only if the plan participant was born before January 2, 1936.

The ordinary income part of the distribution is the amount shown in box 2a of the Form 1099-R given to you by the payer, minus the amount, if any, shown in box 3. You can also treat the capital gain part of the distribution (box 3 of Form 1099-R) as ordinary income for the 10-year tax option if you do not choose capital gain treatment for that part.

Complete Part III of Form 4972 to choose the 10-year tax option. You must use the special Tax Rate Schedule shown in the instructions for Part III to figure the tax.

Rollover of nontaxable amounts. You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made to another qualified retirement plan that is a qualified employee plan or a 403(b) plan, or to a traditional or Roth IRA. The transfer must be made either through a direct rollover to a qualified plan or 403(b) plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to a traditional or Roth IRA.

If you roll over only part of a distribution that includes both taxable and nontaxable amounts, the amount you roll over is treated as coming first from the taxable part of the distribution.

Any after-tax contributions that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. To recover your basis when you take distributions from your IRA, you must complete Form 8606, Nondeductible IRAs, for the year of the distribution. For more information, see the Form 8606 instructions.

Withholding requirements. If an eligible rollover distribution is paid to you, the payer must withhold 20% of it. This applies even if you plan to roll over the distribution to another qualified retirement plan or to an IRA. However, you can avoid withholding by choosing the direct rollover option.

Direct rollover option. You can choose to have any part or all of an eligible rollover distribution paid directly to another qualified retirement plan that accepts rollover distributions or to a traditional or Roth IRA.

There is an automatic rollover requirement for mandatory distributions. A mandatory distribution is a distribution made without your consent and before you reach age 62 or normal retirement age, whichever is later. The automatic rollover requirement applies if the distribution is more than $1,000 and is an eligible rollover distribution. You can choose to have the distribution paid directly to you or rolled over directly to your traditional or Roth IRA or another qualified retirement plan. If you do not make this choice, the plan administrator will automatically roll over the distribution into an IRA of a designated trustee or issuer.

No tax withheld. If you choose the direct rollover option, or have an automatic rollover, no tax will be withheld from any part of the distribution that is directly paid to the trustee of the other plan. If any part of the eligible rollover distribution is paid to you, the payer must generally withhold 20% of it for income tax.

If you are under age 59½ when a distribution is paid to you, you may have to pay a 10% tax (in addition to the regular income tax) on the taxable part (including any tax withheld) that you do not roll over.

Rolling over more than amount received. If you decide to roll over an amount equal to the distribution before withholding, your contribution to the new plan or IRA must include other money (for example, from savings or amounts borrowed) to replace the amount withheld.

Qualified domestic relations order (QDRO). You may be able to roll over tax free all or part of a distribution from a qualified retirement plan that you receive under a QDRO. If you receive the distribution as an employee's spouse or former spouse (not as a nonspousal beneficiary), the rollover rules apply to you as if you were the employee.

Rollover by surviving spouse. You may be able to roll over tax free all or part of a distribution from a qualified retirement plan you receive as the surviving spouse of a deceased employee. The rollover rules apply to you as if you were the employee. You can roll over the distribution into a qualified retirement plan or a traditional or Roth IRA.

Reasonable period of time. The plan administrator must provide you with a written explanation no earlier than 90 days and no later than 30 days before the distribution is made. However, you can choose to have a distribution made less than 30 days after the explanation is provided as long as the following two requirements are met.

  • You must have the opportunity to consider whether or not you want to make a direct rollover for at least 30 days after the explanation is provided.
  • The information you receive must clearly state that you have the right to have 30 days to make a decision.

Contact Troyan, Inc.® the Pension Evaluators® for further service input.

Distributions that do not qualify. The following distributions do not qualify as lump-sum distributions for the capital gain treatment or 10-year tax option.

  • The part of a distribution not rolled over if the distribution is partially rolled over to another qualified plan or an IRA.
  • Any distribution if an earlier election to use either the 5- or 10-year tax option had been made after 1986 for the same plan participant.
  • U.S. Retirement Plan Bonds distributed with a lump sum.
  • Any distribution made during the first five tax years that the participant was in the plan, unless it was made because the participant died.
  • The current actuarial value of any annuity contract included in the lump sum. (Form 1099-R, box 8, should show this amount, which you use only to figure tax on the ordinary income part of the distribution.)
  • Any distribution to a 5% owner that is subject to penalties under section 72(m)(5)(A) of the Internal Revenue Code.
  • A distribution from an IRA.
  • A distribution from a tax-sheltered annuity (section 403(b) plan).
  • A distribution of the redemption proceeds of bonds rolled over tax free to a qualified pension plan, etc., from a qualified bond purchase plan.
  • A distribution from a qualified plan if the participant or his or her surviving spouse previously received an eligible rollover distribution from the same plan (or another plan of the employer that must be combined with that plan for the lump-sum distribution rules) and the previous distribution was rolled over tax free to another qualified plan or an IRA.
  • A distribution from a qualified plan that received a rollover after 2001 from an IRA (other than a conduit IRA), a governmental section 457 plan, or a section 403(b) tax-sheltered annuity on behalf of the plan participant.
  • A distribution from a qualified plan that received a rollover after 2001 from another qualified plan on behalf of that plan participant's surviving spouse.
  • A corrective distribution of excess deferrals, excess contributions, excess aggregate contributions, or excess annual additions.
  • A lump-sum credit or payment from the Federal Civil Service Retirement System (or the Federal Employees' Retirement System).

Tax on Early Distributions

Most distributions (both periodic and nonperiodic) from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59½ are subject to an additional tax of 10%. This tax applies to the part of the distribution that you must include in gross income. It does not apply to any part of a distribution that is tax free, such as amounts that represent a return of your cost or that were rolled over to another retirement plan. It also does not apply to corrective distributions of excess deferrals, excess contributions, or excess aggregate contributions (discussed earlier under

For this purpose, a qualified retirement plan is:

  • A qualified employee plan (including a qualified cash or deferred arrangement (CODA) under Internal Revenue Code section 401(k)),
  • A qualified employee annuity plan,
  • A tax-sheltered annuity plan (403(b) plan), or
  • An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here or an IRA).

5% rate on certain early distributions from deferred annuity contracts. If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Attach an explanation to your return.

Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period. If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from your 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the in-plan Roth rollover that you had to include in income (recapture amount). A separate 5-year period applies to each in-plan Roth rollover.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution allocable to an in-plan Roth rollover is separately determined for each in-plan Roth rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

The courts consider the tax consequences to be a relevant factor in property division. In many states, the statutes either explicitly, or as interpreted by the courts, require consideration of the tax consequences in the distribution of a pension. In other jurisdictions, appellate courts require similar considerations, even when the applicable statue is silent with respect to tax consequences.

Tax consequences are a discretionary issue faced by the courts in factoring the amount subject to equitable distribution and community property division. Pension Evaluators® at Troyan Inc.® can approach this issue if requested. We can provide pension evaluations that recognize the tax impact of retirement benefits in divorce. If requested, upon reciept of your Pension Evaluation request, we can also supply you with your states applicable case law on this issue.

Taxpayers involved in divorce should consider the tax implications of distributing the benefits from retirement plans between the parties. Only if the settlement is qualified will the benefits and the tax liability vest with the transferee (receiving) spouse.

Individual retirement account benefits must be transferred based on a court order or written settlement agreement. In determining asset allocations for property settlements, employee retirement plans are often a taxpayer's most significant asset.

Since many jurisdictions treat retirement plans as assets subject to division in divorce settlements, more spouses are including them in divorce proceedings. Case law indicates that an attorney's failure to claim retirement benefits in a divorce settlement may be malpractice (Gorman v. Gorman, 90 Cal. App.3d 454)

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