Pension plans are set up and maintained through your job. The company sets up a plan based on strict IRS
guidelines and offers the plan to each of its employees. There are many types of plans available. The most
commonly used plans are as follows

A deferred compensation plan is a pension that allows employees to voluntarily contribute an amount (usually
up to 15%) of their income per payday to a retirement plan. The contribution is not subject to federal income
taxes until the taxpayer withdraws the funds from the plan. All of the distributions from this type of retirement plan
are taxable when received. A 401(k) plan is one of the most common types of deferred compensation.

Non-contributory plans do not allow any contributions by the employee. An example is military retirement. The
employer and employee enter into a contract requiring a specified number of years of employment in exchange
for a specific amount of monthly retirement once the employee fulfills his or her obligation. All of the distributions
from this type of retirement plan are taxable when received.

An annuity is a pension plan that requires employees to pay for a future retirement benefit. An example of this
type of plan is a Civil Service pension. The payment is deducted from an employee‘s paycheck every payday after
taxes are deducted. A portion of each distribution is not taxed.

Taxpayers can transfer funds from their qualified retirement plans to an IRA or other qualified plan within 60 days
without paying any income tax. The opportunity to roll over pension plan funds into alternate plans or an IRA is an
ideal way for an employee who leaves their job to avoid the tax liability assessed when the plan is terminated
and a check is issued.

Taxpayers have the option to roll over distributed amounts within 60 days. The rollover is a tax benefit, which
eliminates the payment of taxes on a distribution made for any reason other than a regular retirement
distribution. Retirement plan administrators/trustees are required by law to permit a transfer of funds from their
retirement plan directly to another qualified plan. This is known as a “Trustee-To-Trustee“ transfer. The law
prefers the “Trustee-To-Trustee“ transfer and discourages “hand check“ distributions by requiring plans to
withhold 20% of the distribution before a check is issued. Therefore, the taxpayer will receive a check for only
80% of the transfer amount. This can be a “tax trap“ for a taxpayer that doesn‘t have the funds available equal to
the amount withheld. The taxpayer needs to replace the 20% from other sources as part of the rollover within the
60-day period, or the 20% will be considered to have been distributed and subject to taxes.

If you receive money from the plan before reaching age 59 1/2 you will be subject to a 10% additional tax unless
you meet one of the exceptions. Some exceptions to the additional tax are:

Distributions made to a taxpayer as a part of a series of substantially equal periodic payments for life beginning
after separation from service.
Distributions made because the taxpayer is permanently and totally disabled.
Distributions to a beneficiary of a deceased taxpayer.
Distributions because a taxpayer is 55 or older and retired or separated from service.
Distributions required by the courts in a divorce settlement.
Distributions used to pay deductible medical expenses (expenses greater than 7.5% of AGI) whether or not the
taxpayer itemizes.
Distributions from an ESOP for dividends on employer securities held by the plan.
Distributions due to an IRS levy of the plan.

An IRA or Individual Retirement Arrangement is a tax deferred savings plan for the taxpayer‘s retirement.
Earnings on an IRA are not subject to tax until they are withdrawn. Contributions are limited to a combined total
of $3,500 per year per taxpayer. IRAs are available to all taxpayers with earned income during the year. There are
4 different types of IRAs available:

You can contribute up to $3,500 a year to your traditional IRA and you may be able to deduct the contribution
directly from the income on your tax return. If you are covered by your employer‘s pension plan the contribution is
only fully deductible if the modified adjusted gross income (MAGI) is below $33,000. If you are married filing a
joint return (MFJ) and both of you are covered by a pension plan, your contributions are fully deductible only if your
MAGI is below $53,000. The deductible contribution is reduced or eliminated as your income increases. If you
and your spouse both work and one of you is not covered by a pension plan, the income limits for fully deductible
contributions are different for each of you. If you are not covered by a pension plan, any contribution up to $3,500
is deductible from your income regardless of the amount of earnings. All distributions from deductible traditional
IRAs are taxable.

If you are covered by a pension plan and because of your modified adjusted gross income (MAGI) and your
income is above certain limits, all or part of your traditional IRA contribution is nondeductible. Form 8606 must
be completed each year when a nondeductible IRA contribution is made. When a distribution is received, Form
8606 is used to determine how much of the distribution is taxable.
Pension and IRA Pension
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