The amount of federal income tax you owe will be determined by the tax laws in effect in the year in which you receive benefit payment. The amount of the tax will depend on a number of factors, including your filing status, the number of deductions and exemptions you claim, and other income sources you might have. Because your Pension Plan payment can only be taken in the form of a lifetime annuity, it is not subject to the early withdrawal penalty of 10%, regardless of the age when you begin receiving payment.
- If you choose a lump-sum payment and have it paid directly to you it is taxable in the year it is distributed to you, unless you roll it over to a new plan or IRA within 60 days. If paid to you, the plan administrator must withhold income tax of 20% from the distribution as a credit toward your federal income tax liability. If you decide to roll over your distribution after taking a lump-sum payment, you must roll over an amount equal to your distribution before withholding. Your rollover contribution to the new plan or IRA must include other money (for example, from your personal savings) to replace the amount that was withheld. (You may avoid the 20% withholding by requesting a direct rollover or direct transfer to the new plan trustee).
Generally, if you take a distribution from the plan before age 59 1/2, it is subject to an early withdrawal penalty of 10% (in addition to regular income taxes), unless you qualify for an exception. For example, the 10% penalty tax doesn't apply to plan distributions received if you terminate employment during or after the year in which you turn age 55.
- If you choose to directly roll over your lump-sum payment, you will not pay any tax until the date you elect to have your benefit distributed to you. Mandatory distributions generally must begin by April 1 of the year after you attain age 70 1/2 if you have not yet initiated payment and these payments are taxable as ordinary income.
- If you choose to have periodic distributions made, the amount of federal income tax you owe will be determined by the tax laws in effect in the year in which you receive payment. While annuity payments taken over your lifetime are not subject to the 10% early withdrawal penalty, lump-sum withdrawals taken before you reach age 55 are subject to this penalty. Mandatory distributions generally must begin by April 1 of the year after you attain age 70 1/2 if you have not yet initiated payment and these payments are taxable as ordinary income.