The Financial Realities of Elder Care & Long-Term Care Insurance
This section gives an overview of the key tax consequences of transactions, such as distributions, rollovers, loans and withdrawals.
Withdrawals and distributions after separation from service are generally included in your taxable income in the year of distribution.
Exceptions to this rule may apply if:
Loans will not cause any tax consequences if they are paid when due. However, if you “default” on a loan or terminate employment and do not repay the loan in its entirety, any outstanding balance will be considered a taxable distribution.
Federal law requires the plan to automatically withhold 20% of the taxable portion of any non-hardship withdrawal and most termination payments. You can avoid the 20% withholding if you elect a direct rollover to an IRA or another employer’s plan. Checks for the appropriate amount(s) must be directly payable to the trustee of the IRA or plan.
If you choose to have the payment made directly to you, you will be subject to 20% withholding, but you still have 60 days to roll over all or a portion of the eligible taxable amount into an IRA or another employer’s plan. This is known as an “indirect” rollover. You can still roll over the entire eligible taxable amount, but you must take funds from other sources to replace the 20% that has been automatically withheld.
Special rules apply to the “non-taxable” portion of your distribution, which is generally comprised of your after-tax contributions. If you wish to roll over the non-taxable portion of your payment you may only do so as a “direct rollover” from the plan. You may not roll over the nontaxable portion of your payment if it was paid directly to you.
After the close of the tax year in which you take a distribution, you will receive a 1099R tax form. It will include information on your distribution. If you do not directly roll over the eligible taxable component of a distribution and later roll over the funds on your own, the tax form will not reflect the rollover. You will need to report the rollover when you file your income tax returns. You should consult your tax advisor to ensure this is properly handled.
Whether or not the 20% withholding covers all of the taxes due on your distribution will depend on your personal tax situation. You may owe additional taxes or you may be eligible for a refund. You should consult your tax advisor to estimate the total amount of tax due.
The IRS mandates an early withdrawal tax of 10% unless one of the following criteria is met:
Remember that the 10% penalty can be avoided if you roll over the taxable portion of your distribution to another qualified plan or IRA.
Translations of any materials into languages other than English are intended solely as a convenience to the non-English-reading public. We have attempted to provide an accurate translation of the original material in English, but due to the nuances in translating to a foreign language, slight differences may exist.
Las traducciones de cualquier material a idiomas que no sean el inglés son para la conveniencia de aquellos que no leen inglés. Hemos intentado proporcionar una traducción precisa del material original en inglés, pero debido a las diferencias de la traducción a un idioma extranjero, pueden existir ligeras diferencias.
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