Publication 575 - Pension And Annuity Income - 2004 Page 14
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36If the distribution is a lump-sum distribution, tax is de-
odic distribution. The denominator is the full unreduced
ferred on all of the NUA unless you choose to include it in
amount of each annuity payment originally provided for.
your income for the year of the distribution.
Single-sum in connection with the start of annuity
A lump-sum distribution for this purpose is the distribu-
payments. If you receive a single-sum payment on or
tion or payment of a plan participant’s entire balance
after your annuity starting date in connection with the start
(within a single tax year) from all of the employer’s qualified
of annuity payments for which you must use the Simplified
plans of one kind (pension, profit-sharing, or stock bonus
Method, treat the single-sum payment as if it were received
plans), but only if paid:
before your annuity starting date. (See Simplified Method
•
Because of the plan participant’s death,
under Taxation of Periodic Payments, earlier, for informa-
•
tion on its required use.) Follow the rules in the next
After the participant reaches age 59
1
/
,
2
discussion, Distribution Before Annuity Starting Date From
•
Because the participant, if an employee, separates
a Qualified Plan.
from service, or
Distribution in full discharge of contract. You may re-
•
After the participant, if a self-employed individual,
ceive an amount on or after the annuity starting date that
becomes totally and permanently disabled.
fully satisfies the payer’s obligation under the contract. The
amount may be a refund of what you paid for the contract
or for the complete surrender, redemption, or maturity of
If you choose to include NUA in your income for
the contract. Include the amount in gross income only to
TIP
the year of the distribution and the participant was
the extent that it exceeds the remaining cost of the con-
born before January 2, 1936, you may be able to
tract.
figure the tax on the NUA using the optional methods
described under Lump-Sum Distributions, later.
If the distribution is not a lump-sum distribution, tax is
Distribution Before Annuity Starting Date
deferred only on the NUA resulting from employee contri-
From a Qualified Plan
butions other than deductible voluntary employee contribu-
tions.
If you receive a nonperiodic distribution before the annuity
The NUA on which tax is deferred should be shown in
starting date from a qualified retirement plan, you generally
box 6 of the Form 1099-R you receive from the payer of the
can allocate only part of it to the cost of the contract. You
distribution.
exclude from your gross income the part that you allocate
When you sell or exchange employer securities with
to the cost. You include the remainder in your gross in-
tax-deferred NUA, any gain is long-term capital gain up to
come.
the amount of the NUA. Any gain that is more than the NUA
For this purpose, a qualified retirement plan is:
is long-term or short-term gain, depending on how long you
•
A qualified employee plan (or annuity contract pur-
held the securities after the distribution.
chased by such a plan),
How to report. Enter the total amount of a nonperiodic
•
A qualified employee annuity plan, or
distribution on Form 1040, line 16a, or Form 1040A, line
•
12a. Enter the taxable amount of the distribution on Form
A tax-sheltered annuity plan (403(b) plan).
1040, line 16b, or Form 1040A, line 12b. However, if you
make a tax-free rollover or elect an optional method of
Use the following formula to figure the tax-free amount of
figuring the tax on a lump-sum distribution, see How to
the distribution.
report in the discussions of those tax treatments, later.
Cost of contract
Amount
Tax-free
x
=
received
amount
Distribution On or After
Account balance
For this purpose, your account balance includes only
Annuity Starting Date
amounts to which you have a nonforfeitable right (a right
If you receive a nonperiodic payment from your annuity
that cannot be taken away).
contract on or after the annuity starting date, you generally
must include all of the payment in gross income. For
Example. Before she had a right to an annuity, Ann
example, a cost-of-living increase in your pension after the
Brown received $50,000 from her retirement plan. She had
$10,000 invested (cost) in the plan. Her account balance
annuity starting date is an amount not received as an
annuity and, as such, is fully taxable.
was $100,000. She can exclude $5,000 of the $50,000
distribution, figured as follows:
Reduction in subsequent payments. If the annuity pay-
ments you receive are reduced because you received the
$10,000
nonperiodic distribution, you can exclude part of the
$50,000
x
=
$5,000
$100,000
nonperiodic distribution from gross income. The part you
can exclude is equal to your cost in the contract reduced by
any tax-free amounts you previously received under the
Defined contribution plan. Under a defined contribution
contract, multiplied by a fraction. The numerator is the
plan, your contributions (and income allocable to them)
reduction in each annuity payment because of the nonperi-
may be treated as a separate contract for figuring the
Page 14
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