Special Tax Notice Regarding 403(b) (TSA) Distributions

Transcription

1 Special Tax Ntice Regarding 403(b) (TSA) Distributins P.O. Bx 7893 Madisn, WI Fax: (608) The IRS requires us t prvide yu with a cpy f the Explanatin f Direct Rllver, Withhlding, and Tax Rules Affecting TSA Accunt Distributins nt less than 30 days, but n mre than 180 days, prir t prcessing yur distributin. Yu have at least 30 days after receiving this ntice t decide whether yu want t directly rll ver yur distributin r have it paid t yu. Hwever, if yu make a decisin in less than 30 days and return the cmpleted withdrawal frm t us, we will cnsider that yu have waived the 30-day-waiting perid. We prcess allwable withdrawal requests as sn as practical after we receive yur cmpleted request frm. We will cntact yu if the requested withdrawal is nt allwable r if the frm is incmplete. If yur withdrawal request is nt received and prcessed within 180 days f the date stamped n the tp f the withdrawal frm, yu must request anther withdrawal frm and begin the prcess again. Please call us at if yu have any questins. Summary This ntice explains hw yu can cntinue t defer federal incme tax n yur retirement savings in yur WEA Member Benefits TSA and cntains imprtant infrmatin yu will need befre yu decide hw t receive yur TSA benefits. This infrmatin is being prvided t yu because all r part f the payment that yu will sn receive frm the TSA may be eligible fr rllver t an IRA r an eligible emplyer plan. A rllver is a payment f all r part f yur benefit t anther plan r IRA that allws yu t cntinue t pstpne taxatin f that benefit until it is paid t yu. A distributin frm yur TSA accunt that is eligible fr a rllver may be paid t yu as cash r can be directly rlled int anther tax-favred plan. Rth TSA distributins can be rlled ver t anther Rth TSA, Rth 401(k), r Rth IRA that will prvide separate accunting fr cntributins and earnings n thse cntributins. Befre-tax TSA cntributins can be rlled ver t a traditinal IRA, SEP IRA, 457(b) plan (gvernmental deferred cmpensatin nly), 401(a) plan, including a prfit sharing plan r a stck bnus plan, a mney purchase plan, r a defined benefit plan; 401(k) plan, r t anther befre-tax 403(b) TSA plan; but nt t a Rth IRA, Rth TSA, Rth 401(k), a SIMPLE IRA, r a Cverdell Educatin Savings Accunt (frmerly knwn as an educatin IRA). All r a prtin f any rllver paid t yu as cash may be subject t 20% federal withhlding. An eligible emplyer plan is nt legally required t accept a rllver. Befre yu decide t rll ver yur distributin t anther emplyer plan, yu shuld find ut whether the plan accepts rllvers and, if s, the types f distributins it accepts as a rllver. Yu shuld als find ut abut any dcuments that yu are required t cmplete befre the receiving plan will accept a rllver. If an emplyer plan accepts yur rllver, the plan may restrict subsequent distributins f the rllver amunt. A subsequent distributin frm the plan that accepts yur rllver may als be subject t different tax treatment than distributins frm yur TSA. Check with the administratr f the plan that is t receive yur rllver prir t making the rllver. 1 TSA

2 BEFORE-TAX ELECTIVE OR NONELECTIVE If yu chse a direct rllver f befre-tax elective and/r nn-elective accunt balances: Yur distributin will nt be taxed in the current year, and n incme tax will be withheld. Yur distributin will be paid directly t yur traditinal IRA r, if yu chse, t anther emplyer s plan that accepts yur rllver. Yur funds will be taxed later when yu take distributins frm the traditinal IRA r the emplyer s plan. Depending upn the type f plan, the later distributin may be subject t different tax treatment than it wuld be if yu had received a taxable distributin frm yur TSA accunt. (Example: Traditinal IRAs may be subject t early distributin penalties prir t age 59½ even when yu have separated frm service with yur emplyer during r after the year yu reach age 55.) If yu chse t have yur distributin paid t yu as cash with the ptin f a 60-day rllver: Yu will receive nly 80% f the distributin because we are required t withhld 20% f the distributin and send it t the Internal Revenue Service (IRS) as incme tax withhlding t be credited against yur taxes. Yur distributin will be taxed in the current year unless yu rll it ver. If yu receive the distributin befre age 59½, yu als may have t pay an additinal 10% federal penalty and a 3.3% state f Wiscnsin penalty. Yu can rll ver all r part f the distributin t yur traditinal IRA r t anther emplyer s plan that accepts yur rllver within 60 days after yu receive the distributin. The amunt rlled ver will nt be taxed until yu take it ut f the traditinal IRA r emplyer s plan. If yu want t rll ver 100% f the distributin t a traditinal IRA r an emplyer s plan, yu must find ther mney t replace the 20% that was withheld. If yu rll ver nly the 80% that yu received, yu will be taxed n the 20% that was withheld and that is nt rlled ver. AFTER-TAX (ROTH) TSA If yu chse a direct rllver f after-tax (Rth) TSA accunt balances: Yur distributin will nt be taxed in the current year, and n incme tax will be withheld. If yur rllver is a qualified distributin, the entire amunt is cnsidered basis, which is the amunt that is nt subject t taxes. If yur ttal r partial distributin is nt qualified, we will reprt cntributins and earnings prprtinately t the recipient plan. Yur distributin will be paid directly t yur Rth IRA r t anther Rth TSA r Rth 401(k) plan that accepts yur rllver and agrees t separately accunt fr the amunt nt includible in incme. Yur earnings may be taxed later if yu take a nnqualified distributin frm the recipient retirement plan. 2 TSA

3 If rllver is t a Rth TSA r Rth 401(k), the new five-year taxable perid becmes the earlier f the distributing plan r recipient plan. If rllver is t a Rth IRA, the new five-year taxable perid takes n the recipient Rth IRA s qualifying perid. If yu chse t have yur nnqualified after-tax distributin paid t yu as cash with the ptin f a 60-day rllver: T anther Rth TSA r t a Rth 401(k): Only taxable earnings can be rlled ver. Distributins that include nn-taxable cntributins must be accmplished thrugh a direct rllver. We are required t withhld 20% f the distributed earnings and send it t the IRS t be credited against yur taxes. Yu can rll ver all r part f the taxable earnings t a Rth 401(k) r t anther emplyer s Rth TSA plan that accepts yur rllver within 60 days after yu receive the distributin and that will prvide separate accunting fr cntributins and earnings n thse cntributins. The amunt rlled ver may nt be taxed unless yu take it ut f the recipient retirement plan as a nnqualified distributin. Unless yu rll it ver, the taxable amunt f yur distributin will be taxed in the current year, and yu may have t pay an additinal 10% federal and 3.3% state f Wiscnsin penalty. If yu want t rll ver 100% f the taxable earnings t anther plan, yu must find ther mney t replace the federal taxes that were withheld n the taxable earnings. If yu rll ver nly a prtin f taxable earnings that yu received, yu will be taxed n the amunt f taxable earnings that was nt rlled ver. New five-year taxable perid becmes that f the recipient plan. T a Rth IRA: All r part f yur accunt can be rlled t a Rth IRA. If nly a prtin is rlled ver, it is treated as cnsisting first f taxable incme. We are required t withhld 20% n the distributed earnings and send it t the IRS t be credited against yur taxes. If yu want t rll ver 100% f the distributin t a Rth IRA, yu must find ther mney t replace the 20% that was withheld. If yu rll ver nly the 80% that yu received, yu will be taxed n the 20% that was withheld and nt rlled ver. Unless yu rll it ver, the taxable amunt f yur distributin will be taxed in the current year, and yu may have t pay an additinal 10% federal and 3.3% state f Wiscnsin penalty. New five-year perid takes n the Rth IRA qualifying perid. 3 TSA

4 If yu chse t have yur qualified distributin paid t yu as cash with the ptin f a 60-day rllver: Qualified distributins are nt taxable and will be recrded as basis by the recipient plan. If rlling t a Rth TSA r Rth 401(k), new five-year taxable perid becmes the earlier f the distributing plan r recipient plan. If rlling t a Rth IRA, new five-year perid takes n the Rth IRA qualifying perid. Mre Infrmatin I. Distributins That Can and Cannt Be Rlled Over... 3 II. Rllvers f Accunt Balances III. Distributin Paid t Yu IV. Surviving Spuses, Alternate Payees, and Other Beneficiaries... 6 V. Hw T Obtain Additinal Infrmatin... 6 I. Distributins That Can and Cannt Be Rlled Over Distributins frm yur TSA accunt may be eligible rllver distributins. This means that they can be rlled ver t certain plans that accept rllvers as explained abve. We can tell yu what prtin f yur distributin is an eligible rllver distributin if yu cntact us prir t requesting r receiving a plan distributin. In additin t the previusly defined restrictins, the fllwing distributins cannt be rlled ver: Distributins Spread Over Lng Perids: Yu cannt rll ver a distributin if it is part f a series f equal (r almst equal) distributins that are made at least nce a year and that will last fr: (1) yur lifetime (r yur life expectancy), (2) yur lifetime and yur beneficiary s lifetime (r jint life expectancies), r (3) a perid f ten years r mre. Required Minimum Distributins: Beginning in the year yu reach age 70½ (if yu have retired), a certain prtin f yur distributin cannt be rlled ver because it is a required minimum distributin (RMD) and must be paid t yu. After-tax (Rth) TSA accunts can avid RMDs by rlling their accunt t a Rth IRA. Hardship Withdrawals: Yu cannt rll ver a hardship withdrawal. The IRS standard f hardship is that a withdrawal will be n accunt f hardship if the withdrawal is necessary in light f immediate and heavy financial needs f the emplyee r their beneficiary that cannt be satisfied frm ther reasnably available resurces. Crrective Distributins: A distributin that is made because legal limits n certain cntributins were exceeded cannt be rlled ver. 4 TSA

5 II. Rllvers f Accunt Balances Direct Rllver Yu can chse a direct rllver f all r any prtin f yur distributin that is an eligible rllver distributin as previusly described. In a direct rllver, the eligible rllver distributin is paid directly frm yur TSA accunt t the apprpriate type f IRA Rth r traditinal r an emplyer plan that accepts rllvers. If the emplyer plan accepts yur rllver, the plan may prvide restrictins n circumstances under which yu may later receive a distributin f the rllver amunt. If yu chse a direct rllver, yu are nt taxed n the distributin. Subsequent befre-tax distributins, and the earnings prtin f any nnqualified Rth distributin, taken later frm the IRA r the emplyer s plan may be subject t tax. The tax treatment f any payment frm a Rth r a traditinal IRA r anther eligible emplyer plan receiving yur direct rllver might be different than if yu received yur benefit in a taxable distributin directly frm yur TSA. Direct Rllver t an IRA: If eligible, yu can pen the apprpriate type f IRA Rth r traditinal t receive the direct rllver. If yu chse t have yur distributin paid directly t an IRA (Rth r traditinal), cntact an IRA spnsr (usually a financial institutin) t find ut hw t have yur distributin made in a direct rllver t an IRA at that institutin. If yu are unsure f hw t invest yur mney, yu can temprarily establish an IRA t receive the distributin. Hwever, in chsing an IRA, yu may wish t cnsider whether the IRA yu chse will allw yu t mve all r a part f yur distributin t anther IRA at a later date withut penalties r ther limitatins. See IRS Publicatin 590, Individual Retirement Arrangements, fr mre infrmatin n IRAs (including limits n hw ften yu can rll ver between IRAs). Direct Rllver t a Plan: If yu are emplyed by a new emplyer that has a plan and yu want a direct rllver t that plan, ask the administratr f that plan whether it will accept yur rllver. If yur new plan des nt accept a rllver, yu can chse a direct rllver t the apprpriate type f IRA Rth r traditinal. Rth TSA distributins rlled ver int anther Rth TSA r Rth 401(k) accunt can be accmplished thrugh a direct rllver f the entire distributin (a 60-day rllver t anther Rth TSA r Rth 401(k) accunt is nt available fr nnqualified tax-free amunts). If the amunt rlled ver is a qualified distributin, the entire amunt f the rllver is allcated t the investment in the cntract (basis). As a result, any subsequent distributin wuld be tax-free. Befre-tax TSA amunts may als be rlled ver t the varius retirement plans explained n page 1. Direct Rllver f a Series f Distributins: If yu receive eligible rllver distributins that are paid in a series fr less than 10 years, yur chice t make r nt make a direct rllver fr a distributin will apply t all later distributins in a series until yu change yur electin. Yu are free t change yur electin fr any later distributins in the series. III. Distributin Paid t Yu If yu have a distributin paid t yu, the taxable prtin is subject t 20% incme tax withhlding. Tax-deferred and the earnings prtin f nnqualified distributins are taxed in the year yu receive it unless, within 60 days, yu rll it ver t the apprpriate type f IRA r anther emplyer plan that accepts rllvers. If yu d nt rll it ver, special tax rules may apply. 5 TSA

6 Incme Tax Withhlding Mandatry Withhlding: If any prtin f the cash distributin t yu is an eligible rllver distributin and yu d nt elect t make a direct rllver, we are required by law t withhld 20% f the taxable amunt. This amunt is sent t the IRS as federal incme tax withhlding. Fr example: if yur eligible rllver distributin is $10,000, (nnqualified after-tax Rth TSA amunts are assumed t have earnings f $10,000 fr purpses f this example) nly $8,000 will be paid t yu because we must withhld $2,000 as federal incme tax. When yu prepare yur incme tax return fr the year, unless yu make a rllver within 60 days, yu will reprt the full $10,000 as a distributin frm yur TSA accunt. Yu will reprt the $2,000 as tax withheld, and it will be credited against any incme tax yu we fr the year. In a Rth TSA, nly the earnings prtin f a nnqualified distributin wuld be subject t 20% withhlding. Qualified Rth TSA distributins are nt subject t withhlding. Vluntary Withhlding: If any prtin f yur distributin is nt an eligible rllver distributin but is taxable, the mandatry withhlding rules described abve d nt apply. In this case, yu may elect nt t have withhlding apply t that prtin. If yu d nthing, 10% will be taken ut f this prtin f yur payment fr federal incme tax withhlding. T elect ut f withhlding, indicate such electin n the relevant WEA Tax Sheltered Annuity Trust withdrawal frm. Sixty-Day Rllver Optin (Indirect Rllver): If yu have an eligible rllver distributin paid t yu, yu can still decide t rll ver all r part f it t the apprpriate IRA Rth r traditinal r t anther emplyer s plan that accepts rllvers. An indirect rllver f a nnqualified Rth TSA t anther Rth TSA r a Rth 401(k) can nly cnsist f taxable earnings. If yu decide t rll ver, yu must cmplete the rllver within 60 days after yu receive the distributin. The prtin f yur distributin that is rlled ver will nt be taxed until yu take it ut f the recipient plan, if taxes apply. If yu rll ver all r part f yur Rth TSA t a Rth IRA, the prtin rlled ver, if nnqualified, is treated as cnsisting first f taxable incme, and then investment. If qualified, it is cnsidered basis. Yu can rll ver up t 100% f the eligible rllver distributin, including an amunt equal t the federal tax that was withheld. If yu chse t rll ver 100%, yu must find ther mney within the 60-day perid t cntribute t the recipient IRA r emplyer s plan t replace any amunt f federal taxes withheld. If yu chse t rll ver nly the amunt yu received, yu may be taxed n the amunt withheld. Example: Yur eligible rllver distributin is $10,000, and yu chse t have it paid t yu. Yu will receive $8,000, and $2,000 will be sent t the IRS as incme tax withhlding (nnqualified aftertax Rth TSA amunts are assumed t have earnings f $10,000 fr purpses f this example). Within 60 days after receiving the $8,000, yu may rll ver the entire $10,000 t the apprpriate type f plan indicated n page 1. T d this, yu rll ver the $8,000 yu received frm yur TSA accunt, and yu will have t find $2,000 frm ther surces (yur savings, a lan, etc.). The entire $10,000 is nt taxed until yu take it ut f the recipient plan, if applicable. If, n the ther hand, yu rll ver nly $8,000, the $2,000 yu did nt rll ver is taxed in the year it was withheld. Regardless f which f these tw scenaris yu chse, yu will receive credit fr the $2,000 withheld when yu file yur incme tax return. Qualified Rth TSA distributins are nt taxable. 6 TSA

7 Additinal Taxes if Yu Are Under Age 59½: If yu receive a distributin befre yu reach age 59½ and yu d nt rll it ver, in additin t the applicable federal and state incme tax, yu may have t pay a federal penalty equal t 10% f the taxable amunt. (Wiscnsin residents may be subject t an additinal 3.3% penalty). The additinal penalties d nt apply t yur distributin if it is: (1) paid t yu because yu separate frm service with yur emplyer during r after the year yu reach age 55 (nt applicable t Rth TSAs), (2) a Rth TSA distributin that is qualified r the prtin that cnsists f cntributins, (3) paid because yu retire due t ttal and permanent disability (Rth TSAs require accunts t have been held fr five years), (4) paid t yu as equal (r almst equal) distributins ver yur life r life expectancy (r yur and yur beneficiary s lives r life expectancies), (5) a payment that des nt exceed the amunt f yur deductible medical expenses, (6) payments that are paid directly t the gvernment t satisfy a federal tax levy, r (7) payments that are paid t an alternate payee under a qualified dmestic relatins rder. See IRS Frm 5329 fr mre infrmatin n the additinal 10% federal penalty. IV. Surviving Spuses, Alternate Payees, and Other Beneficiaries In general, mst rules summarized abve that apply t distributins t emplyees als apply t distributins t surviving spuses f emplyees, nn-spusal beneficiaries, and t spuses r frmer spuses wh are alternate payees. Yu are an alternate payee if yur interest in a TSA accunt results frm a qualified dmestic relatins rder, which is an rder issued by a curt usually in cnnectin with a divrce r legal separatin. Sme f the rules summarized abve als apply t a deceased emplyee s beneficiary wh is nt their spuse. Hwever, there are sme exceptins fr distributins t surviving spuses, alternate payees, and ther beneficiaries that shuld be mentined. If yu are a surviving spuse r alternate payee, yu have the same chices as an emplyee. Yu may chse t have an eligible rllver distributin paid in a direct rllver t the apprpriate IRA Rth r Traditinal, t anther emplyer plan that accepts rllvers, r t yu. If yu have the distributin paid t yu, yu have the ptin t rll it ver within 60 days refer t Sectin III. If yu are a beneficiary ther than the surviving spuse, yu may rll ver yur inherited TSA accunt t an inherited IRA nly. If yu are an alternate payee, yu cannt chse a direct rllver and yu cannt rllver the distributin yurself. If yu are a beneficiary ther than a surviving spuse r an alternate payee, such as a child r dmestic partner, yu may chse t have a payment that can be rlled ver, paid in a direct rllver t a Traditinal IRA, r paid t yu. Yu may nt rll ver the payment t yurself r t an eligible emplyer plan. The IRA accepting the transfer is treated like a nn-spuse inherited IRA, under which benefits must be distributed in accrdance with the applicable required minimum distributin rules. In general, distributins frm the rllver IRA must either be paid t yu in full within five years f the emplyee s death r must cmmence within twelve mnths f the emplyee s death ver yur life expectancy. The benefits cannt be rlled ver again frm the rllver IRA. If yu are a surviving spuse, an alternate payee, r anther beneficiary f a befre-tax TSA r qualified Rth TSA, the distributin paid t yu is nt subject t the additinal 10% penalty described in Sectin III, even if yu are yunger than age 59½. If the distributin is rlled ver t an IRA Rth r Traditinal r anther emplyer plan, the additinal 10% penalty may apply. The 10% penalty may als apply t nn-qualified distributins whether r nt it is rlled ver. 7 TSA

8 V. Hw t Obtain Additinal Infrmatin This ntice summarizes nly the federal (nt state r lcal) tax rules that might apply t yur distributin. The rules described abve are cmplex and cntain many cnditins and exceptins that are nt included in this ntice. Therefre, yu may want t cnsult with the plan administratr r a prfessinal tax advisr befre yu take a distributin f yur benefits frm yur TSA accunt. Als, yu can find mre specific infrmatin n the tax treatment f distributins frm TSA plans in IRS Publicatin 571, Tax- Sheltered Annuity Prgrams fr Emplyees f Public Schls and Certain Tax-Exempt Organizatins; IRS Publicatin 575, Pensin and Annuity Incme; and IRS Publicatin 590, Individual Retirement Arrangements. These publicatins are available frm yur lcal IRS ffice, n the IRS s Internet Web site at r by calling TAX-FORM. 8 TSA