Taxatioin of Retirement Benefits

As a general rule, benefits received from an employer retirement plan or other tax deductible retirement savings account (like an IRA) are fully taxable as ordinary income when the benefits are received. But there are a variety of significant exceptions.

Distributions from an IRA or other tax qualified retirement savings plan may be subject to a 10% penalty tax (in addition to the regular income tax on the distribution) if the distribution is made before age 59.5. However, there are numerous exceptions to the penalty tax.

Benefits received from a Roth IRA are not taxable so long as the account beneficiary is over the age of 59.5.

When an employee contributes to a retirement savings plan, the amount contributed from after tax income is recovered tax free -- usually based on a formula that divides the total benefit payment between a recovery of the amount paid by the employee and the rest of the benefit received.

Distributions from deferred annuities purchased by the taxpayer with after funds are also divided between the amount paid by the taxpayer and the balance of the expected distributions. Special rules apply with respect to distributions from variable annuities.

For estate tax purposes, the value of any undistributed assets in a tax qualified retirement savings plan or deferred annuity account are included in the taxable estate, even though the balance in the account is to be paid to a designated beneficiary. In addition, the beneficiary of the account will be subject to income taxes on the amounts included in the taxable estate but may be able to take an income tax deduction for the estate taxes paid on those amounts.

This page provides links to articles or reports about some of those exceptions. We make no claim that this is an exhaustive or comprehensive list of such exceptions and we welcome articles or reports by qualified tax professionals who are willing to contribute their insight and experience to this subject.

Lump sum pension distributions for taxpayers born before 1936.

http://www.smartmoney.com/retirement/planning/index.cfm?story=intro

Copyright, 2003, Vernon K. Jacobs

Vernon Jacobs is the Editor/Publisher of The International Wealth Protection Reports, which are a collection of research reports on legal methods of asset protection and tax avoidance. Further information on this subject is available at http://www.offshorepress.com/  Jacobs is a CPA who has worked as a free lance tax and financial author/editor since 1977. Details about his credentials and experience are online at http://www.offshorepress.com/vkjcpa/  

ElderTax Index