Early Withdrawals from Retirement Plans

Many people find it necessary to take out money early from their IRA or retirement plan. Doing so, however, can trigger an additional tax on top of income tax taxpayers may have to pay. Here are a few key points to know about taking an early distribution:

Early Withdrawals. An early withdrawal normally is taking cash out of a retirement plan before the taxpayer is 59½ years old.

Additional Tax. If a taxpayer took an early withdrawal from a plan last year, they must report it to the IRS. They may have to pay income tax on the amount taken out. If it was an early withdrawal, they may have to pay an additional 10 percent tax.

Nontaxable Withdrawals. The additional 10 percent tax does not apply to nontaxable withdrawals. These include withdrawals of contributions that taxpayers paid tax on before they put them into the plan. A rollover is a form of nontaxable withdrawal. A rollover occurs when people take cash or other assets from one plan and put the money in another plan. They normally have 60 days to complete a rollover to make it tax-free.

Check Exceptions. There are many exceptions to the additional 10 percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

File Form 5329. If someone took an early withdrawal last year, they may have to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with their federal tax return. Form 5329 has more details.

Use IRS e-file. Early withdrawal rules can be complex. IRS e-file is the easiest and most accurate way to file a tax return. The tax software that taxpayers use to e-file will pick the right tax forms, do the math and help get the tax benefits they are due. Seven out of 10 taxpayers qualify to use IRS Free File tax software. Free File is only available through the IRS website at IRS.gov/freefile.

Courtesy of IRS

For more information contact Neikirk, Mahoney and Smith at 502-896-2999

IRS Offers More Flexibility in Pension Plan Payments

The Internal Revenue Service has issued final regulations allowing pension recipients to split their benefits between both monthly annuity payments and a lump sum.

The final regulations change the rules for the minimum present value requirements for defined benefit plan distributions to enable plans to simplify the treatment of certain optional forms of benefit that are paid partly in the form of an annuity and partly in a single sum or some other more accelerated form.

The IRS issued proposed regulations in 2012 on the change and issued the final regulations with a few changes last week. The final regulations will allow pensioners to bifurcate their benefit payments so they can receive more of the pension benefits during their lifetime without disqualifying the pension plan under previous IRS rules.

The final regulations affect participants, beneficiaries, sponsors and administrators of defined benefit pension plans. The regs are effective on Sept. 9, 2016, and apply to distributions with annuity starting dates in plan years beginning on or after on or after Jan. 1, 2017. Taxpayers can also opt to apply the regulations for any earlier period.

Courtesy of AccountingToday

For more information contact Neikrik, Mahoney and Smith at 502-896-2999

New Procedure for Retirement Plan Rollovers

The Internal Revenue Service today provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement (IRA).

In Revenue Procedure 2016-47, posted today on IRS.gov, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Courtesy of IRS

For more information contact Neikirk, Mahoney and Smith at 502-896-2999

Universal Availability Rules in a 403(b) Retirement Plan

Don’t forget to register for the free webcast about Understanding the Universal Availability Rules in a 403(b) Retirement Plan

When: May 19, 2016; 2 p.m. (Eastern)

Learn about:
Basic universal availability rules

Treatment of adjunct faculty at universities

Treatment of part-time, seasonal, and temporary employees

The 20 hours per week and the 1,000 hours rules

Controlled group situations and concerns

Mayo ruling on medical residents and its impact

The required notice to employees each year

Ways to find, fix, and avoid universal availability errors

Register here

For more help on this topic contact Neikirk, Mahoney & Smith at 502-896-2999