Amounts Received Under the Plan

March 13, 2024

4062 / How are dividends under a tax sheltered annuity treated for income tax purposes?

<div class="Section1">Dividends are treated as earnings on 403(b) investments. The IRS treats interest on accumulated dividends as part of a retirement fund and interest is not taxed until the participant begins to receive distributions from the fund.<a href="#_ftn1" name="_ftnref1">1</a><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. General Information Letter, Jan. 20, 1978. </div></div>

March 13, 2024

4059 / May an employee, the employee’s surviving spouse, or a non-spouse beneficiary rollover a distribution from a tax sheltered annuity?

<div class="Section1">Yes, but only certain distributions may be rolled over ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4007">4007</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4014">4014</a>).<a href="#_ftn1" name="_ftnref1">1</a><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. See IRC §§ 402(c)(2)(A), 402(c)(11). </div></div>

March 13, 2024

4074 / What distributions from a tax sheltered annuity are subject to a penalty for early or premature distributions?

<div class="Section1"> If a taxpayer receives a taxable amount from a tax sheltered annuity including any amount attributable to accumulated deductible contributions and including plan loan amounts treated as deemed distributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4063">4063</a>), the taxpayer will be subject to an excise tax of 10 percent on that distribution unless the distribution is: (1)  made on or after the date on which an employee attains age 59½;<a href="#_ftn1" name="_ftnref1">1</a> (2)  made to a beneficiary or the employee’s estate on or after the death of the employee;<a href="#_ftn2" name="_ftnref2">2</a> (3)  attributable to an employee’s disability;<a href="#_ftn3" name="_ftnref3">3</a> (4)  part of a series of substantially equal periodic payments made not less frequently than annually for the life or life expectancy of the employee or the joint lives or joint life expectancies of the employee and the employee’s beneficiary and beginning after the employee separates from the service of the employer.<a href="#_ftn4" name="_ftnref4">4</a> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3679">3679</a> discusses acceptable methods for meeting this exception. If the series of payments is later modified other than because of death or disability before the employee reaches age 59½ or, if after the employee reaches age 59½, within five years of the date of the first payment, the employee’s tax for the year the modification occurs is increased by an amount equal to the tax that, but for the exception, would have been imposed plus interest for the deferral period;<a href="#_ftn5" name="_ftnref5">5</a> (5)  made to an employee on account of separation from service after attaining age 55.<a href="#_ftn6" name="_ftnref6">6</a> A distribution will be treated as falling within this exception if the distribution is made after the employee has separated from service and the separation occurs during or after the calendar year in which the employee attains age 55;<a href="#_ftn7" name="_ftnref7">7</a> (6)  properly made to an alternate payee under a qualified domestic relations order ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4035">4035</a>);<a href="#_ftn8" name="_ftnref8">8</a> (7)  made to an employee for medical care but not in excess of the amount allowable as a medical expense deduction to the employee for amounts paid during the taxable year for medical care determined without regard to whether the employee itemizes deductions for the year. Apparently, this exempts from the penalty only amounts in excess of the 7.5 percent floor on deductible medical expenses;<a href="#_ftn9" name="_ftnref9">9</a> (8)  timely made to correct an excess aggregate contribution<a href="#_ftn10" name="_ftnref10">10</a> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4038">4038</a>); (9)  timely made to reduce an excess elective deferral ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="4047">4047</a>); (10)  made on account of a qualified birth or adoption for tax years in an amount up to $5,000 beginning after 2019.<a href="#_ftn11" name="_ftnref11">11</a> (11) made on account of a qualifying disaster for periods after January 26, 2021 in an amount up to $22,000. (12) made to employees who have experienced domestic violence for periods beginning after December 31, 2023 in an amount equal to the lesser of $10,000 (the $10,000 amount will be indexed for inflation for tax years after 2024) or 50% of the employee’s vested balance. (13) made to employees who are experiencing personal or family emergencies for periods beginning after December 31, 2023 in an amount up to the lesser of $1,000, or the employee’s vested balance minus $1,000. (14) made to employees who have been diagnosed with terminal illnesses for periods beginning after December 29, 2022. (15) made to employees for long-term care insurance expenses in an amount equal to the lesser of (1) the cost of the employee’s long-term care insurance premiums, (2) 10% of the employee’s vested account balance, or (3) $2,500 (as indexed after 2024) for periods beginning after December 29, 2025. The costs of life insurance protection that are included in an employee’s income are not considered as distributions for purposes of applying the premature distribution penalty.<a href="#_ftn12" name="_ftnref12">12</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3948">3948</a> regarding the proper measure of the value of current life insurance protection. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 72(t)(2)(i). <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 72(t)(2)(ii). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 72(t)(2)(iii). <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 72(t)(2)(A)(iv), 72(t)(3). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 72(t)(4). <a href="#_ftnref6" name="_ftn6">6</a>.  IRC § 72(t)(2)(A)(v). <a href="#_ftnref7" name="_ftn7">7</a>.  Notice 87-13, 1987-1 CB 432, A-20. <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 72(t)(2)(C). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 72(t)(2)(B); see Ann. 87-2, 1987-2 IRB 38. <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 401(m)(7). <a href="#_ftnref11" name="_ftn11">11</a>.  IRC § 402(g)(2)(C). <a href="#_ftnref12" name="_ftn12">12</a>.  Notice 89-25, 1989-1 CB 662, A-11. </div></div>