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| Taxation of Benefits |
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There is little mystery and a lot of misunderstanding surrounding the taxation of distributions from qualified
plans, military retirement systems and federal government retirements systems. The following is a summary of the
tax effects of distributions from retirement plans and systems:
Qualified plans:
Distributions from qualified plans, including section 403(b) plans, are taxable in the taxable year of the distributee.
If the distributee is an alternate payee who is the spouse or former spouse of the participant, the alternate payee
will be considered the distributee and any distribution from the plan will be taxed to the alternate payee. If
the distributee is the participant or an alternate payee who is a child or other dependent of the participant,
the participant will be considered the distributee and any distribution will be taxed to the participant.
All distributions from a qualified plan pursuant to a qualified domestic relations order escape the IRC section
72 10% penalty for premature distributions, even if the participant is the distributee.
Distributions from a qualified plan may be rolled over into an Individual Retirement Account (IRA) or another qualified
plan pursuant to the rules under IRC section 72.
Military retirement systems:
Distributions from military retirement systems under Title 10 U.S.C. section ______ are subject to taxation to
the distributee. A former spouse will be considered a distributee if the distribution is made pursuant to a qualifying
court order identified in Title 10 U.S.C. section 1408. Distributions from military retirement systems are not
subject to the rollover provisions of IRC section ____.
Federal government systems:
Most employees of the federal government are eligible for participation in either the Civil Service Retirement
System (CSRS) or the newer Federal Government Retirement System (FERS). Some employees also participate in the
Thrift Savings Plan. The Thrift Savings Plan is the federal government employees' section 401(k) equivalent plan,
i.e., it is a cash or deferred arrangement that allows employees to make pre-tax deposits to a plan.
Distributions from the CSRS and FERS are subject to taxation to the distributee. A former spouse will be considered
a distributee if the distribution is made pursuant to a court order acceptable for processing identified in Title
_____ section ____. Distributions from CSRS or FERS are not subject to the rollover provisions of IRC section ____.
Distribution from the Thrift Savings Plan are subject to taxation to the distributee. A former spouse will be considered
a distributee if the distribution is made pursuant to a court order. Distributions from the Thrift Savings Plan
are ……….
Internal Revenue Code sections:
IRC section 402(a).
Taxability of beneficiary of employees' trust. (a) Taxability of beneficiary of exempt trust. Except as otherwise
provided in this section, any amount actually distributed to any distributee by any employees' trust described
in section 401(a) which is exempt from tax under section 501(a) shall be taxable to the distributee, in the taxable
year of the distributee in which distributed under section 72 (relating to annuities).
IRC section (402(e)(1)(A).
Alternate payee treated as distributee. For purposes of subsection (a) and section 72, an alternate payee who is
the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment
made to the alternate payee under a qualified domestic relations order (as defined in section 414(p).
IRC section 72. |
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