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Pension Plan Rollover Solutions Lump sum payments Many plans provide for a recipient to elect to receive a distribution consisting of his or her entire interest in the plan. If such a lump-sum distribution is received at retirement or other termination of employment, after reaching age 59 1/2, or due to the employee's disability or death, the taxable portion of the distribution may qualify for special tax treatment. Pension Plan Rollovers into Annuities Rather than having the distribution taxed in the year of receipt, the recipient may roll over all or part of the taxable portion of the lump-sum distribution to an annuity. If the benefits are taken as an annuity or installment payments, they will be paid over the recipient's (and, perhaps, a beneficiary's) lifetime or for a fixed term of years. In either event, the benefits are taxed under the tax law's annuity rules. In general, the entire amount of each periodic payment to be taxed where no employee contributions were made. If the employee contributed to the plan, the portion of each payment attributable to after-tax employee contributions is not taxable. The remainder is taxed and several special rules and exceptions may apply. If the rollover is completed within 60 days after receiving the distribution the recipient pays no immediate tax on the amount rolled over or on any earnings generated by that amount. When distributions are made from an IRA they are taxed as ordinary income. Forward averaging or capital gains treatment is not allowed for this type of distribution. If only part of the taxable portion of the lump sum is rolled over, the remainder is taxed immediately without the benefit of forward averaging or capital gain treatment. Averaging Prior to the tax reform act of 1986 a recipient of a lump-sum distribution could elect to use a favorable 10-year forward averaging method to calculate the income tax on the distribution. Forward averaging involves calculating the tax as if the distribution were received over ten years and results in a lower current tax on the lump sum. The Tax reform Act of 1986 retained forward averaging, but made a number of modifications:
Other Possible tax implications Excise Tax on Excess Benefits The tax reform act of 1986 also imposed a 15% excise tax on "excess distributions" from tax-qualified retirement plans, tax-sheltered annuities, and IRAs. The purpose of the tax is to discourage the accumulation of extraordinary large retirement benefits. In determining what is an excess distribution, aggregate annual distributions from all pension, profit-sharing, stock-bonus, and annuity plans, IRAs, and tax-sheltered annuities are taken into account, no matter the form of distribution. All distributions received during a year under a life annuity, a term certain or other are considered in applying the tax. We look forward to answering any questions that you may have concerning a pension rollover and the many options available to you.
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