Q: Is my pension check taxable?

A: Most pensions are fully taxable. Some are partially taxable if you had a cost basis in the pension. In a few unique situations they may be tax-free. This is especially the case when they come from the Veterans Administration and when they involve disability payments for public safety officers and firemen.
You should receive a Form 1099-R from the plan administrator. It usually tells you how much of the payment is taxable. See the instructions for IRS Form 1040 or 1040A and also see IRS Pub 575, Pensions and Annuities for more information. You can get access at www.irs.gov by clicking on the link at the left side of the page to Forms & Publications.

Q: Can you withdraw funds from a pension before age 59 1/2 and avoid the early withdrawal penalty?

A: Yes there are exceptions to the early withdrawal penalty for qualified retirement pension plans. Here are 4 exceptions:

The 10% additional tax does not apply to distributions that are:

• Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service).

• Made because you are totally and permanently disabled, or

• Made on or after the death of the plan participant or contract holder, or

• From a qualified retirement pension plan after your separation from service in or after the year you reached age 55.

You can find all the exception starting on page 28 in IRS Pub 575.
http://www.irs.gov/publications/index.html

Q: How do deferred tax contributions at work relate to the IRA contributions limits for individuals?
My wife contributes, thru an automatic deduction at work, to a tax sheltered annuity. I contribute, thru an automatic deduction at work , to a before-tax deferred savings plan.

A: Contribution limits to an IRA are not affected by contributions to retirement plans. When you are actively participating in a retirement plan at work, your ability to deduct a contribution to a traditional IRA may be reduced to zero. The deduction is limited by your income.

Each of the tax booklets (1040 and 1040A) have a worksheet you can use to determine how much of any traditional IRA contribution can be taken as a tax deduction. The income limits are indexed by inflation for each tax year.
Please see the tax booklets or read IRS Pub 590 for more detail information.
http://www.irs.gov/publications/index.html

Please note that if your income precludes you from taking a tax deduction for an IRA contribution, you may want to think about making that contribution to a Roth IRA.

Q: I was recently laid off and withdrew my 401k balance to live on. Do I have to pay a penalty for early withdrawal? I am 58 years old.

A: As you separated from employment and are at least age 55, you are exempt from the 10% early withdrawal penalty. Your former employer should place a Code 2 (Known Exception Exists) in Box 7 of the 1099-R that will be sent to you. If there is some other code in that box, then you will have to complete IRS Form 5329 and place a Code 01 on Line 2 of that form.

Q: How do I get back the taxes withheld by the plan administrator of my 401K when I rolled over a distribution?

I rolled over a pension distribution from a former employer to an IRA within the required 60 day period. I rolled over the net amount received as well as the amount of tax withheld by the employer in order to avoid any taxation.

A: You will have to wait until you file your tax return to obtain a refund. Any amount withheld by the employer should be included with all other taxes withheld and entered on Line 63 of the 1040. The employer will send you a Form 1099-R that reflects the withholding. You would attach a copy of this 1099-R with your W-2s to the tax return.

Q: Is the pension my mother receives from the Veterans Administration upon the death of my father taxable to her?

A: Death benefit pension payments from the VA are not taxable income.

Q: Is there any tax problem with collecting a pension from one company while earning another pension with a new employer?

I had 20 yrs. with an old employer and am now with a different company and plan to stay with them until I retire at age 65. If I took an early retirement package at age 60 with my old company how would it effect my taxes and does it create any problems having retirement pay from one company while still working at a normal job?

A: There is no reason why someone can't collect a pension from Company A while working for Company B and earning another pension. Your new employer should care less.

If you start to collect your pension from your previous employer, the payments would naturally add to your taxable gross income and would be taxed at whatever marginal tax bracket you are in. If you reside in a state that also has an income tax and does not provide any exemption for pension income, you would also be taxed by that state.

Q: Does the amount I contribute to my company's pension plan qualify for the Qualified Retirement Savings Credit? I presently have voluntary contributions taken from my pay for my company's defined-benefit retirement plan. I am unsure since it is taken out after payroll taxes are taken out of my pay.

A: After-tax voluntary contributions to a qualified employer retirement plan are eligible contributions for purposes of the savings credit.

Q: What happens if I want to rollover a pension plan with employer stock that has net unrealized appreciation to an IRA?

A: Here is how employer stock that has NUA works:

You have a choice. You can take the stock and pay ordinary tax rates on your cost basis, rather than its fair market value. You wind up deferring the tax on the NUA. When you sell the stock in the future you get to use long term capital gain rates (currently either 5% or 15% depending upon your ordinary rate.) on the NUA component. Any appreciation that takes place after the distribution will be taxed at either short term or long term capital gains tax rates depending on your holding period. If you choose to rollover the stock into an IRA, you are foregoing the special tax treatment and no tax would be due on the distribution rolled over to the IRA. However, when you take any distribution from that IRA, it will be taxed at ordinary rates.

Q: Do I need to amend prior year tax returns if I mistakenly reported pension income as wages?

A: There is no difference in taxable income but see below for state income tax considerations. As such, I would not amend prior year returns. Just follow the rules in the future and report the income as a pension. Should you receive a letter or deficiency notice from the IRS or any state tax authority for any tax year, respond in writing on a timely basis and just explain what happened.

If you live in a state that has a personal income tax and provides some form of pension income exclusion or some other form of tax benefit on pension income that you failed to take because of your mistake, you should amend your state tax returns to get the tax benefit. Contact your state for the rules about how many years you can amend.

Q: How do I report the correct amount of taxable income from two 1099-Rs? One is for the transfer of my pre-tax 401K balance to an IRA and the other one is for a distribution of my after-tax contributions. Both appear to have the proper codes in Box 7.

A: The following assumes you are using IRS Form 1040. You can find equivalent lines on the Form 1040A.

You add the amounts from both 1099Rs identified as your gross distributions and enter the total on Line 16a of the 1040. You enter a zero on Line 16b. Write the word ROLLOVER anywhere on that line.

Q: How is the appreciation in value of my 401K plan taxed? As an example let's say I contributed $200,000, my company $100,000 and the account has appreciated by $300,000 so today it has a value of $600,000. I am age 65.

A: You do not pay any tax on a 401K plan until you take a distribution. As you have not paid any tax on any amount in your retirement plan, every dollar you withdraw from your 401K will be taxed to you at your personal income tax rate. There is an exception to this rule if you have purchased some of your employer's stock in your plan. You can withdraw the securities and only pay income tax on the cost basis (not the market value) of the securities. When you later sell the stock, your gain is taxed at the long term capital gains rate rather than your normal rate. This excess of market value over cost basis is known as NUA (net unrealized appreciation).

Q: How do I keep track of the cost basis in an IRA into which I rolled over both pre-tax and after-tax contributions I made to my employer's 401K plan?

A: You should complete Part I of IRS Form 8606 and treat the rollover of the after-tax contributions as if it was a nondeductible contribution to an IRA. Completion of this section of the form will establish your cost basis in the IRA. Just make a note on the form that you are reporting an after-tax pension rollover.

Q: Are there any tax consequences if my grandmother who is 81 years old and just retired rolls over her 401K into an IRA? She has been told she needs to do something with the money in her 401k and was going to roll it into an IRA. She wants to know how she will be taxed?

A: When a taxpayer rolls over funds from a retirement plan at work to a traditional IRA there is no tax consequence as long as the funds flow from one trustee to the other trustee or if the taxpayer actually receives the funds, the taxpayer redeposits the gross amount withdrawn before any tax withholding into an IRA within 60 days from distribution of the funds.

Assuming the 401K is with the employer from which she just retired, there has not been a need to take a minimum required distribution (MRD) until now. As your grandmother is past age 70 1/2 and just retired, she is required to take an MRD from her plan. An MRD can not be rolled over. She should first have the retirement plan issue her the MRD and then have the plan administrator transfer the balance to her IRA account. Her MRD is taxable income.

Q: I am the beneficiary of approximately $240,000 in retirement benefits from my deceased brother. (His entire estate is well under $1 million).

Will I have to pay taxes on the inherited cash benefits? Is the entire amount viewed as "income"? And, if so, is inherited income taxed at a lesser rate?

A: If you are the beneficiary of pension benefits, you will report the income in the same way the plan participant would have reported it. If the distribution would have been taxable to the decedent it is taxable to you. As a beneficiary of these benefits, you are not subject to any 10% early withdrawal penalty.

Starting with tax years beginning after 12/31/06, a nonspouse beneficiary of a qualified retirement plan will be allowed to rollover the plan proceeds to an Inherited IRA. In this manner, the beneficiary will have the choice to either remove the amount over five years or commence taking minimum required distributions over his or her lifetime.

Q: When a withdrawal is made from a 401K, is state income tax paid to the state where one is currently resident, or to the state of residence at the time that the money was earned?

A: You pay taxes to the state in which you are now a resident. You should check with your state tax authorities to see if all pensions are taxed or whether there is some partial tax exemption for your type of pension.

Q: Can we deduct any of the losses from my husband's 401K Retirement plan on our Federal taxes? He is 64, employed full-time and has never made any withdrawals, but it has decreased significantly over the past year. Our gross income for 2008 was $106,000.

A: Decreases in value of tax deferred retirement accounts are not reportable. This is no different then you not having to report increases in value in past years. The only event in a tax deferred retirement account that has a tax consequence is a distribution.