2016 Publication 575 P575

User Manual: 575

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Department of the Treasury
Internal Revenue Service
Publication 575
Cat. No. 15142B
Pension
and Annuity
Income
For use in preparing
2016 Returns
Get forms and other information faster and easier at:
IRS.gov (English)
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Contents
Reminders ............................... 1
Introduction .............................. 2
General Information ........................ 3
Variable Annuities ........................ 4
Section 457 Deferred Compensation Plans ...... 5
Disability Pensions ....................... 5
Insurance Premiums for Retired Public Safety
Officers ............................. 6
Railroad Retirement Benefits ................ 6
Withholding Tax and Estimated Tax ........... 9
Cost (Investment in the Contract) ............ 10
Taxation of Periodic Payments .............. 11
Fully Taxable Payments .................. 11
Partly Taxable Payments .................. 12
Taxation of Nonperiodic Payments ........... 15
Figuring the Taxable Amount ............... 15
Loans Treated as Distributions ............. 18
Transfers of Annuity Contracts .............. 19
Lump-Sum Distributions .................. 20
Rollovers ............................... 27
Special Additional Taxes ................... 31
Tax on Early Distributions ................. 32
Tax on Excess Accumulation ............... 35
Survivors and Beneficiaries ................. 37
How To Get Tax Help ...................... 37
Worksheet A. Simplified Method ............. 41
Index .................................. 42
Reminders
Future developments. For the latest information about
developments related to Pub. 575, such as legislation
enacted after it was published, go to www.irs.gov/pub575.
Net investment income tax. For purposes of the net in-
vestment income tax (NIIT), net investment income
doesn't include distributions from a qualified retirement
plan (for example, 401(a), 403(a), 403(b), 408, 408A, or
457(b) plans). However, these distributions are taken into
account when determining the modified adjusted gross in-
come threshold. Distributions from a nonqualified retire-
ment plan are included in net investment income. See
Form 8960, Net Investment Income Tax - Individuals, Es-
tates, and Trusts, and its instructions for more information.
Expanded exception to the tax on early distributions
from a governmental plan for qualified public safety
employees. For tax years beginning after December 31,
Jan 04, 2017
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2015, in addition to those employees described in Quali
fied public safety employees, the definition is expanded to
include the following:
Federal law enforcement officers,
Federal customs and border protection officers,
Federal firefighters,
Air traffic controllers,
Nuclear materials couriers,
Members of the United States Capitol Police,
Members of the Supreme Court Police, and
Diplomatic security special agents of the United
States Department of State.
In addition, the exception to the tax is extended to distri-
butions from governmental defined contribution plans, as
well as governmental defined benefit plans.
For more information, see Tax on Early Distributions
later.
Rollovers to SIMPLE retirement accounts. You can
roll over amounts from a qualified retirement plan (as de-
scribed under Rollovers, later) or an IRA into a SIMPLE
retirement account as follows:
1. During the first 2 years of participation in a SIMPLE
retirement account, you may roll over amounts from
one SIMPLE retirement account into another SIMPLE
retirement account, and
2. After the first 2 years of participation in a SIMPLE re-
tirement account, you may roll over amounts from a
SIMPLE retirement account, a qualified retirement
plan or an IRA into a SIMPLE retirement account.
For more information, see Rollovers later.
Photographs of missing children. The Internal Reve-
nue Service is a proud partner with the National Center for
Missing & Exploited Children® (NCMEC). Photographs of
missing children selected by the Center may appear in
this publication on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST
(1-800-843-5678) if you recognize a child.
Introduction
This publication discusses the tax treatment of distribu-
tions you receive from pension and annuity plans and also
shows you how to report the income on your federal in-
come tax return. How these distributions are taxed de-
pends on whether they are periodic payments (amounts
received as an annuity) that are paid at regular intervals
over several years or nonperiodic payments (amounts not
received as an annuity).
What is covered in this publication? This publication
contains information that you need to understand the fol-
lowing topics.
How to figure the tax-free part of periodic payments
under a pension or annuity plan, including using a
simple worksheet for payments under a qualified plan.
How to figure the tax-free part of nonperiodic pay-
ments from qualified and nonqualified plans, and how
to use the optional methods to figure the tax on
lump-sum distributions from pension, stock bonus,
and profit-sharing plans.
How to roll over certain distributions from a retirement
plan into another retirement plan or IRA.
How to report disability payments, and how beneficia-
ries and survivors of employees and retirees must re-
port benefits paid to them.
How to report railroad retirement benefits.
When additional taxes on certain distributions may ap-
ply (including the tax on early distributions and the tax
on excess accumulation).
For additional information on how to report pen
sion or annuity payments on your federal income
tax return, be sure to review the instructions on
the back of Copies B, C, and 2 of the Form 1099R that
you received and the instructions for Form 1040, lines 16a
and 16b (Form 1040A, lines 12a and 12b or Form
1040NR, lines 17a and 17b).
A “corrected” Form 1099R replaces the corre
sponding original Form 1099R if the original
Form 1099R contained an error. Make sure you
use the amounts shown on the corrected Form 1099R
when reporting information on your tax return.
What isn't covered in this publication? The following
topics aren't discussed in this publication.
The General Rule. This is the method generally used
to determine the tax treatment of pension and annuity in-
come from nonqualified plans (including commercial an-
nuities). For a qualified plan, you generally can't use the
General Rule unless your annuity starting date is before
November 19, 1996. Although this publication will help
you determine whether you can use the General Rule, it
won't help you use it to determine the tax treatment of
your pension or annuity income. For that and other infor-
mation on the General Rule, see Pub. 939, General Rule
for Pensions and Annuities.
Individual retirement arrangements (IRAs). Infor-
mation on the tax treatment of amounts you receive from
an IRA is in Pub. 590-B, Distributions from Individual Re-
tirement Arrangements (IRAs).
Civil service retirement benefits. If you are retired
from the federal government (regular, phased, or disability
retirement) or are the survivor or beneficiary of a federal
employee or retiree who died, get Pub. 721, Tax Guide to
U.S. Civil Service Retirement Benefits. Pub. 721 covers
the tax treatment of federal retirement benefits, primarily
TIP
CAUTION
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those paid under the Civil Service Retirement System
(CSRS) or the Federal Employees' Retirement System
(FERS). It also covers benefits paid from the Thrift Sav-
ings Plan (TSP).
Social security and equivalent tier 1 railroad retire
ment benefits. For information about the tax treatment of
these benefits, see Pub. 915, Social Security and Equiva-
lent Railroad Retirement Benefits. However, this publica-
tion (575) covers the tax treatment of the non-social se-
curity equivalent benefit portion of tier 1 railroad retirement
benefits, tier 2 benefits, vested dual benefits, and supple-
mental annuity benefits paid by the U.S. Railroad Retire-
ment Board.
Taxsheltered annuity plans (403(b) plans). If you
work for a public school or certain tax-exempt organiza-
tions, you may be eligible to participate in a 403(b) retire-
ment plan offered by your employer. Although this publi-
cation covers the treatment of benefits under 403(b) plans
and discusses in-plan Roth rollovers from 403(b) plans to
designated Roth accounts, it doesn't cover other tax provi-
sions that apply to these plans. For that and other informa-
tion on 403(b) plans, see Pub. 571, Tax-Sheltered Annuity
Plans (403(b) Plans) For Employees of Public Schools
and Certain Tax-Exempt Organizations.
Comments and suggestions. We welcome your com-
ments about this publication and your suggestions for fu-
ture editions.
You can send us comments from irs.gov/formspubs.
Click on “More Information” and then on “Give us feed-
back.”
Or you can write to:
Internal Revenue Service
Tax Forms and Publications
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224
We respond to many letters by telephone. Therefore, it
would be helpful if you would include your daytime phone
number, including the area code, in your correspondence.
Although we cannot respond individually to each com-
ment received, we do appreciate your feedback and will
consider your comments as we revise our tax products.
Ordering forms and publications. Visit irs.gov/
formspubs to download forms and publications. Other-
wise, you can go to irs.gov/orderforms to order current
and prior-year forms and instructions. Your order should
arrive within 10 business days.
Tax questions. If you have a tax question not an-
swered by this publication, check IRS.gov and How To
Get Tax Help at the end of this publication.
Useful Items
You may want to see:
Publication
Credit for the Elderly or the Disabled 524
Taxable and Nontaxable Income
Retirement Plans for Small Business (SEP,
SIMPLE, and Qualified Plans)
Tax-Sheltered Annuity Plans (403(b) Plans) For
Employees of Public Schools and Certain
Tax-Exempt Organizations
Contributions to Individual Retirement
Arrangements (IRAs)
Distributions from Individual Retirement
Arrangements (IRAs)
Tax Guide to U.S. Civil Service Retirement
Benefits
Social Security and Equivalent Railroad
Retirement Benefits
General Rule for Pensions and Annuities
Form (and Instructions)
Withholding Certificate for Pension or Annuity
Payments
Distributions From Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs,
Insurance Contracts, etc.
Tax on Lump-Sum Distributions
Additional Taxes on Qualified Plans (Including
IRAs) and Other Tax-Favored Accounts
See How To Get Tax Help near the end of this publication
for information about getting publications and forms.
General Information
Definitions. Some of the terms used in this publication
are defined in the following paragraphs.
Pension. A pension is generally a series of definitely
determinable payments made to you after you retire from
work. Pension payments are made regularly and are
based on such factors as years of service and prior com-
pensation.
Annuity. An annuity is a series of payments under a
contract made at regular intervals over a period of more
than 1 full year. They can be either fixed (under which you
receive a definite amount) or variable (not fixed). You can
buy the contract alone or with the help of your employer.
Qualified employee plan. A qualified employee plan
is an employer's stock bonus, pension, or profit-sharing
plan that is for the exclusive benefit of employees or their
beneficiaries and that meets Internal Revenue Code re-
quirements. It qualifies for special tax benefits, such as tax
deferral for employer contributions and capital gain treat-
ment or the 10-year tax option for lump-sum distributions
(if participants qualify). To determine whether your plan is
a qualified plan, check with your employer or the plan ad-
ministrator.
Qualified employee annuity. A qualified employee
annuity is a retirement annuity purchased by an employer
525
560
571
590-A
590-B
721
915
939
W-4P
1099-R
4972
5329
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for an employee under a plan that meets Internal Revenue
Code requirements.
Designated Roth account. A designated Roth ac-
count is a separate account created under a qualified
Roth contribution program to which participants may elect
to have part or all of their elective deferrals to a 401(k),
403(b), or 457(b) plan designated as Roth contributions.
Elective deferrals that are designated as Roth contribu-
tions are included in your income. However, qualified dis-
tributions (explained later) aren't included in your income.
You should check with your plan administrator to deter-
mine if your plan will accept designated Roth contribu-
tions.
Taxsheltered annuity plan. A tax-sheltered annuity
plan (often referred to as a 403(b) plan or a tax-deferred
annuity plan) is a retirement plan for employees of public
schools and certain tax-exempt organizations. Generally,
a tax-sheltered annuity plan provides retirement benefits
by purchasing annuity contracts for its participants.
Types of pensions and annuities. Pensions and annui-
ties include the following types.
Fixedperiod annuities. You receive definite
amounts at regular intervals for a specified length of time.
Annuities for a single life. You receive definite
amounts at regular intervals for life. The payments end at
death.
Joint and survivor annuities. The first annuitant re-
ceives a definite amount at regular intervals for life. After
he or she dies, a second annuitant receives a definite
amount at regular intervals for life. The amount paid to the
second annuitant may or may not differ from the amount
paid to the first annuitant.
Variable annuities. You receive payments that may
vary in amount for a specified length of time or for life. The
amounts you receive may depend upon such variables as
profits earned by the pension or annuity funds, cost-of-liv-
ing indexes, or earnings from a mutual fund.
Disability pensions. You receive disability payments
because you retired on disability and haven't reached
minimum retirement age.
More than one program. You may receive employee
plan benefits from more than one program under a single
trust or plan of your employer. If you participate in more
than one program, you may have to treat each as a sepa-
rate pension or annuity contract, depending upon the
facts in each case. Also, you may be considered to have
received more than one pension or annuity. Your former
employer or the plan administrator should be able to tell
you if you have more than one contract.
Example. Your employer set up a noncontributory
profit-sharing plan for its employees. The plan provides
that the amount held in the account of each participant will
be paid when that participant retires. Your employer also
set up a contributory defined benefit pension plan for its
employees providing for the payment of a lifetime pension
to each participant after retirement.
The amount of any distribution from the profit-sharing
plan depends on the contributions (including allocated for-
feitures) made for the participant and the earnings from
those contributions. Under the pension plan, however, a
formula determines the amount of the pension benefits.
The amount of contributions is the amount necessary to
provide that pension.
Each plan is a separate program and a separate con-
tract. If you get benefits from these plans, you must ac-
count for each separately, even though the benefits from
both may be included in the same check.
Distributions from a designated Roth account are
treated separately from other distributions from
the plan.
Qualified domestic relations order (QDRO). A QDRO
is a judgment, decree, or order relating to payment of child
support, alimony, or marital property rights to a spouse,
former spouse, child, or other dependent of a participant
in a retirement plan. The QDRO must contain certain spe-
cific information, such as the name and last known mailing
address of the participant and each alternate payee, and
the amount or percentage of the participant's benefits to
be paid to each alternate payee. A QDRO may not award
an amount or form of benefit that isn't available under the
plan.
A spouse or former spouse who receives part of the
benefits from a retirement plan under a QDRO reports the
payments received as if he or she were a plan participant.
The spouse or former spouse is allocated a share of the
participant's cost (investment in the contract) equal to the
cost times a fraction. The numerator of the fraction is the
present value of the benefits payable to the spouse or for-
mer spouse. The denominator is the present value of all
benefits payable to the participant.
A distribution that is paid to a child or other dependent
under a QDRO is taxed to the plan participant.
Variable Annuities
The tax rules in this publication apply both to annuities
that provide fixed payments and to annuities that provide
payments that vary in amount based on investment results
or other factors. For example, they apply to commercial
variable annuity contracts, whether bought by an em-
ployee retirement plan for its participants or bought di-
rectly from the issuer by an individual investor. Under
these contracts, the owner can generally allocate the pur-
chase payments among several types of investment port-
folios or mutual funds and the contract value is deter-
mined by the performance of those investments. The
earnings aren't taxed until distributed either in a with-
drawal or in annuity payments. The taxable part of a distri-
bution is treated as ordinary income.
For information on the tax treatment of a transfer or ex-
change of a variable annuity contract, see Transfers of
Annuity Contracts under Taxation of Nonperiodic Pay
ments, later.
CAUTION
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Net investment income tax. Annuities under a nonqua-
lified plan are included in calculating your net investment
income for the net investment income tax (NIIT). For infor-
mation see the Instructions for Form 8960, Net Investment
Income Tax — Individuals, Estates and Trusts.
Withdrawals. If you withdraw funds before your annuity
starting date and your annuity is under a qualified retire-
ment plan, a ratable part of the amount withdrawn is tax
free. The tax-free part is based on the ratio of your cost
(investment in the contract) to your account balance under
the plan.
If your annuity is under a nonqualified plan (including a
contract you bought directly from the issuer), the amount
withdrawn is allocated first to earnings (the taxable part)
and then to your cost (the tax-free part). However, if you
bought your annuity contract before August 14, 1982, a
different allocation applies to the investment before that
date and the earnings on that investment. To the extent
the amount withdrawn doesn't exceed that investment and
earnings, it is allocated first to your cost (the tax-free part)
and then to earnings (the taxable part).
If you withdraw funds (other than as an annuity) on or
after your annuity starting date, the entire amount with-
drawn is generally taxable.
The amount you receive in a full surrender of your an-
nuity contract at any time is tax free to the extent of any
cost that you haven't previously recovered tax free. The
rest is taxable.
For more information on the tax treatment of withdraw-
als, see Taxation of Nonperiodic Payments, later. If you
withdraw funds from your annuity before you reach age 59
12, also see Tax on Early Distributions under Special Addi
tional Taxes, later.
Annuity payments. If you receive annuity payments un-
der a variable annuity plan or contract, you recover your
cost tax free under either the Simplified Method or the
General Rule, as explained under Taxation of Periodic
Payments, later. For a variable annuity paid under a quali-
fied plan, you generally must use the Simplified Method.
For a variable annuity paid under a nonqualified plan (in-
cluding a contract you bought directly from the issuer),
you must use a special computation under the General
Rule. For more information, see Variable annuities in Pub.
939 under Computation Under the General Rule.
Death benefits. If you receive a single-sum distribution
from a variable annuity contract because of the death of
the owner or annuitant, the distribution is generally taxable
only to the extent it is more than the unrecovered cost of
the contract. If you choose to receive an annuity, the pay-
ments are subject to tax as described above. If the con-
tract provides a joint and survivor annuity and the primary
annuitant had received annuity payments before death,
you figure the tax-free part of annuity payments you re-
ceive as the survivor in the same way the primary annui-
tant did. See Survivors and Beneficiaries, later.
Section 457 Deferred
Compensation Plans
If you work for a state or local government or for a tax-ex-
empt organization, you may be able to participate in a
section 457 deferred compensation plan. If your plan is an
eligible plan, you aren't taxed currently on pay that is de-
ferred under the plan or on any earnings from the plan's
investment of the deferred pay. You are generally taxed
on amounts deferred in an eligible state or local govern-
ment plan only when they are distributed from the plan.
You are taxed on amounts deferred in an eligible tax-ex-
empt organization plan when they are distributed or other-
wise made available to you.
Your 457(b) plan may have a designated Roth account
option. If so, you may be able to roll over amounts to the
designated Roth account or make contributions. Elective
deferrals to a designated Roth account are included in
your income. Qualified distributions (explained later) aren't
included in your income. See the Designated Roth ac
counts discussion under Taxation of Periodic Payments,
later.
This publication covers the tax treatment of benefits un-
der eligible section 457 plans, but it doesn't cover the
treatment of deferrals. For information on deferrals under
section 457 plans, see Retirement Plan Contributions un-
der Employee Compensation in Pub. 525.
Is your plan eligible? To find out if your plan is an eligi-
ble plan, check with your employer. Plans that aren’t eligi-
ble section 457 plans include the following:
Bona fide vacation leave, sick leave, compensatory
time, severance pay, disability pay, or death benefit
plans.
Nonelective deferred compensation plans for nonem-
ployees (independent contractors).
Deferred compensation plans maintained by
churches.
Length of service award plans for bona fide volunteer
firefighters and emergency medical personnel. An ex-
ception applies if the total amount paid to a volunteer
exceeds $3,000 for any year of service.
Disability Pensions
If you retired on disability, you generally must include in in-
come any disability pension you receive under a plan that
is paid for by your employer. You must report your taxable
disability payments as wages on line 7 of Form 1040 or
Form 1040A or on line 8 of Form 1040NR until you reach
minimum retirement age. Minimum retirement age gener-
ally is the age at which you can first receive a pension or
annuity if you aren't disabled.
You may be entitled to a tax credit if you were per
manently and totally disabled when you retired.
For information on this credit, see Pub. 524.
Beginning on the day after you reach minimum retire-
ment age, payments you receive are taxable as a pension
TIP
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or annuity. When you receive pension or annuity pay-
ments you are able to recover your cost or investment.
Your cost is generally your net investment in the plan as of
your annuity starting date. It doesn't include pre-tax contri-
butions. For more information, see Cost (Investment in the
Contract) and Taxation of Periodic Payments, later.
Report the payments on Form 1040, lines 16a and 16b;
Form 1040A, lines 12a and 12b; or on Form 1040NR,
lines 17a and 17b.
Disability payments for injuries incurred as a di
rect result of a terrorist attack directed against the
United States (or its allies) aren't included in in
come. For more information about payments to survivors
of terrorist attacks, see Pub. 3920, Tax Relief for Victims
of Terrorist Attacks.
Military and government disability pensions. Certain
military and government disability pensions aren’t taxable.
Serviceconnected disability. You may be able to
exclude from income amounts you receive as a pension,
annuity, or similar allowance for personal injury or sick-
ness resulting from active service in one of the following
government services:
The armed forces of any country,
The National Oceanic and Atmospheric Administra-
tion,
The Public Health Service, or
The Foreign Service.
Insurance Premiums for Retired
Public Safety Officers
If you are an eligible retired public safety officer (law en-
forcement officer, firefighter, chaplain, or member of a res-
cue squad or ambulance crew), you can elect to exclude
from income distributions made from your eligible retire-
ment plan that are used to pay the premiums for accident
or health insurance or long-term care insurance. The pre-
miums can be for coverage for you, your spouse, or de-
pendents. The distribution must be made directly from the
plan to the insurance provider. You can exclude from in-
come the smaller of the amount of the insurance premi-
ums or $3,000. You can only make this election for
amounts that would otherwise be included in your income.
The amount excluded from your income can't be used to
claim a medical expense deduction.
An eligible retirement plan is a governmental plan that
is:
a qualified trust,
a section 403(a) plan,
a section 403(b) annuity, or
a section 457(b) plan.
If you make this election, reduce the otherwise taxable
amount of your pension or annuity by the amount
excluded. The amount shown in box 2a of Form 1099-R
TIP
doesn't reflect this exclusion. Report your total distribu-
tions on Form 1040, line 16a; Form 1040A, line 12a; or
Form 1040NR, line 17a. Report the taxable amount on
Form 1040, line 16b; Form 1040A, line 12b; or Form
1040NR, line 17b. Enter “PSO” next to the appropriate line
on which you report the taxable amount.
If you are retired on disability and reporting your disabil-
ity pension on line 7 of Form 1040 or Form 1040A, or
line 8 of Form 1040NR, include only the taxable amount
on that line and enter “PSO” and the amount excluded on
the dotted line next to the applicable line.
Railroad Retirement Benefits
Benefits paid under the Railroad Retirement Act fall into
two categories. These categories are treated differently
for income tax purposes.
The first category is the amount of tier 1 railroad retire-
ment benefits that equals the social security benefit that a
railroad employee or beneficiary would have been entitled
to receive under the social security system. This part of
the tier 1 benefit is the social security equivalent benefit
(SSEB) and you treat it for tax purposes like social secur-
ity benefits. If you received, repaid, or had tax withheld
from the SSEB portion of tier 1 benefits during 2016, you
will receive Form RRB-1099, Payments by the Railroad
Retirement Board (or Form RRB-1042S, Statement for
Nonresident Alien Recipients of Payments by the Railroad
Retirement Board, if you are a nonresident alien) from the
U.S. Railroad Retirement Board (RRB).
For more information about the tax treatment of the
SSEB portion of tier 1 benefits and Forms RRB-1099 and
RRB-1042S, see Pub. 915.
The second category contains the rest of the tier 1 rail-
road retirement benefits, called the non-social security
equivalent benefit (NSSEB). It also contains any tier 2
benefit, vested dual benefit (VDB), and supplemental an-
nuity benefit. Treat this category of benefits, shown on
Form RRB-1099-R, as an amount received from a quali-
fied employee plan. This allows for the tax-free (nontaxa-
ble) recovery of employee contributions from the tier 2
benefits and the NSSEB part of the tier 1 benefits. (The
NSSEB and tier 2 benefits, less certain repayments, are
combined into one amount called the Contributory
Amount Paid on Form RRB-1099-R.) Vested dual benefits
and supplemental annuity benefits are non-contributory
pensions and are fully taxable. See Taxation of Periodic
Payments, later, for information on how to report your ben-
efits and how to recover the employee contributions tax
free. Form RRB-1099-R is used for U.S. citizens, resident
aliens, and nonresident aliens.
Nonresident aliens. A nonresident alien is an individual
who isn't a citizen or a resident alien of the United States.
Nonresident aliens are subject to mandatory U.S. tax with-
holding unless exempt under a tax treaty between the Uni-
ted States and their country of legal residency. A tax
treaty exemption may reduce or eliminate tax withholding
from railroad retirement benefits. See Tax withholding
next for more information.
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If you are a nonresident alien and your tax withholding
rate changed or your country of legal residence changed
during the year, you may receive more than one Form
RRB-1042S or Form RRB-1099-R. To determine your to-
tal benefits paid or repaid and total tax withheld for the
year, you should add the amounts shown on all forms you
received for that year. For information on filing require-
ments for aliens, see Pub. 519, U.S. Tax Guide for Aliens.
For information on tax treaties between the United States
and other countries that may reduce or eliminate U.S. tax
on your benefits, see Pub. 901, U.S. Tax Treaties.
Tax withholding. To request or change your income tax
withholding from SSEB payments, U.S. citizens should
contact the IRS for Form W-4V, Voluntary Withholding Re-
quest, and file it with the RRB. To elect, revoke, or change
your income tax withholding from NSSEB, tier 2, VDB,
and supplemental annuity payments received, use Form
RRB W-4P, Withholding Certificate for Railroad Retire-
ment Payments. If you are a nonresident alien or a U.S.
citizen living abroad, you should provide Form RRB-1001,
Nonresident Questionnaire, to the RRB to furnish citizen-
ship and residency information and to claim any treaty ex-
emption from U.S. tax withholding. Nonresident U.S. citi-
zens can't elect to be exempt from withholding on
payments delivered outside of the United States.
Help from the RRB. To request an RRB form or to get
help with questions about an RRB benefit, you should
contact your nearest RRB field office if you reside in the
United States (call 1-877-772-5772 for the nearest field of-
fice) or U.S. consulate/Embassy if you reside outside the
United States. You can visit the RRB on the Internet at
https://secure.rrb.gov/
Form RRB-1099-R. The following discussion explains
the items shown on Form RRB-1099-R. The amounts
shown on this form are before any deduction for:
Federal income tax withholding,
Medicare premiums,
Legal process garnishment payments,
Recovery of a prior year overpayment of an NSSEB,
tier 2 benefit, VDB, or supplemental annuity benefit, or
Recovery of Railroad Unemployment Insurance Act
benefits received while awaiting payment of your rail-
road retirement annuity.
The amounts shown on this form are after any offset
for:
Social Security benefits,
Age reduction,
Public Service pensions or public disability benefits,
Dual railroad retirement entitlement under another
RRB claim number,
Work deductions,
Legal process partition deductions,
Actuarial adjustment,
Annuity waiver, or
Recovery of a current-year overpayment of NSSEB,
tier 2, VDB, or supplemental annuity benefits.
The amounts shown on Form RRB-1099-R do not re-
flect any special rules, such as capital gain treatment or
the special 10-year tax option for lump-sum payments, or
tax-free rollovers. To determine if any of these rules apply
to your benefits, see the discussions about them later.
Generally, amounts shown on your Form RRB-1099-R
are considered a normal distribution. Use distribution
code “7” if you are asked for a distribution code. Distribu-
tion codes aren't shown on Form RRB-1099-R.
There are three copies of this form. Copy B is to be in-
cluded with your income tax return if federal income tax is
withheld. Copy C is for your own records. Copy 2 is filed
with your state, city, or local income tax return, when re-
quired. See the illustrated Copy B (Form RRB-1099-R)
above.
Each beneficiary will receive his or her own Form
RRB1099R. If you receive benefits on more than
one railroad retirement record, you may get more
than one Form RRB1099R. So that you get your form
timely, make sure the RRB always has your current mail
ing address.
Box 1—Claim Number and Payee Code. Your claim
number is a six- or nine-digit number preceded by an al-
phabetical prefix. This is the number under which the RRB
paid your benefits. Your payee code follows your claim
number and is the last number in this box. It is used by the
RRB to identify you under your claim number. In all your
correspondence with the RRB, be sure to use the claim
number and payee code shown in this box.
Box 2—Recipient's Identification Number. This is
the recipient's U.S. taxpayer identification number. It is the
social security number (SSN), individual taxpayer identifi-
cation number (ITIN), or employer identification number
(EIN), if known, for the person or estate listed as the recip-
ient.
If you are a resident or nonresident alien who
must furnish a taxpayer identification number to
the IRS and aren’t eligible to obtain an SSN, use
Form W7, Application for IRS Individual Taxpayer Identifi
cation Number, to apply for an ITIN. The Instructions for
Form W7 explain how and when to apply.
Box 3—Employee Contributions. This is the amount
of taxes withheld from the railroad employee's earnings
that exceeds the amount of taxes that would have been
withheld had the earnings been covered under the social
security system. This amount is the employee's cost that
you use to figure the tax-free part of the NSSEB and tier 2
benefit you received (the amount shown in box 4). (For in-
formation on how to figure the tax-free part, see Partly
Taxable Payments under Taxation of Periodic Payments,
later.) The amount shown is the total employee contribu-
tion amount, not reduced by any amounts that the RRB
calculated as previously recovered. It is the latest amount
reported for 2016 and may have increased or decreased
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from a previous Form RRB-1099-R. If this amount has
changed, the change is retroactive. You may need to re-
figure the tax-free part of your NSSEB/tier 2 benefit for
2016 and prior tax years. If this box is blank, it means that
the amount of your NSSEB and tier 2 payments shown in
box 4 is fully taxable.
If you had a previous annuity entitlement that
ended and you are figuring the taxfree part of
your NSSEB/tier 2 benefit for your current annuity
entitlement, you should contact the RRB for confirmation
of your correct employee contribution amount.
Box 4—Contributory Amount Paid. This is the gross
amount of the NSSEB and tier 2 benefit you received in
2016, less any 2016 benefits you repaid in 2016. (Any
benefits you repaid in 2016 for an earlier year or for an un-
known year are shown in box 8.) This amount is the total
contributory pension paid in 2016. It may be partly taxable
and partly tax free or fully taxable. If you determine you
are eligible to compute a tax-free part as explained later in
Partly Taxable Payments under Taxation of Periodic Pay
ments, use the latest reported employee contribution
amount shown in box 3 as the cost.
Box 5—Vested Dual Benefit. This is the gross
amount of vested dual benefit (VDB) payments paid in
2016, less any 2016 VDB payments you repaid in 2016. It
is fully taxable. VDB payments you repaid in 2016 for an
earlier year or for an unknown year are shown in box 8.
Note. The amounts shown in boxes 4 and 5 may rep-
resent payments for 2016 and/or other years after 1983.
Box 6—Supplemental Annuity. This is the gross
amount of supplemental annuity benefits paid in 2016,
less any 2016 supplemental annuity benefits you repaid in
2016. It is fully taxable. Supplemental annuity benefits you
repaid in 2016 for an earlier year or for an unknown year
are shown in box 8.
CAUTION
!
Box 7—Total Gross Paid. This is the sum of boxes 4,
5, and 6. The amount represents the total pension paid in
2016. Include this amount on Form 1040, line 16a; Form
1040A, line 12a; or Form 1040NR, line 17a.
Box 8—Repayments. This amount represents any
NSSEB, tier 2 benefit, VDB, and supplemental annuity
benefit you repaid to the RRB in 2016 for years before
2016 or for unknown years. The amount shown in this box
hasn't been deducted from the amounts shown in boxes
4, 5, and 6. It only includes repayments of benefits that
were taxable to you. This means it only includes repay-
ments in 2016 of NSSEB benefits paid after 1985, tier 2
and VDB benefits paid after 1983, and supplemental an-
nuity benefits paid in any year. If you included the benefits
in your income in the year you received them, you may be
able to deduct the repaid amount. For more information
about repayments, see Repayment of benefits received in
an earlier year, later.
You may have repaid an overpayment of benefits
by returning a payment, by making a payment, or
by having an amount withheld from your railroad
retirement annuity payment.
Box 9—Federal Income Tax Withheld. This is the
total federal income tax withheld from your NSSEB, tier 2
benefit, VDB, and supplemental annuity benefit. Include
this on your income tax return as tax withheld. If you are a
nonresident alien and your tax withholding rate and/or
country of legal residence changed during 2016, you will
receive more than one Form RRB-1099-R for 2016. Deter-
mine the total amount of U.S. federal income tax withheld
from your 2016 RRB NSSEB, tier 2, VDB, and supple-
mental annuity payments by adding the amounts in box 9
of all original 2016 Forms RRB-1099-R, or the latest cor-
rected or duplicate Forms RRB-1099-R you receive.
Box 10—Rate of Tax. If you are taxed as a U.S. citi-
zen or resident alien, this box doesn't apply to you. If you
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Sample
PAYER’S NAME, STREET ADDRESS, CITY, STATE, AND ZIP CODE
UNITED STATES RAILROAD RETIREMENT BOARD
844 N RUSH ST CHICAGO IL 60611-2092
ANNUITIES OR PENSIONS BY THE
RAILROAD RETIREMENT BOARD
PAYER’S FEDERAL IDENTIFYING NO.
FORM RRB-1099-R
COPY B -
REPORT THIS INCOME ON
YOUR FEDERAL TAX
RETURN. IF THIS FORM
SHOWS FEDERAL INCOME
TAX WITHHELD IN BOX 9
ATTACH THIS COPY TO
YOUR RETURN.
THIS INFORMATION IS BEING
FURNISHED TO THE INTERNAL
REVENUE SERVICE.
1.
2.
Claim Number and Payee Code
Recipient’s Number
Recipient’s Name, Street Address, City, State, and Zip Code
3.
4.
5.
6.
7.
8.
9.
10. 11.
Employee Contributions
Contributory Amount Paid
Vested Dual
Supplemental Annuity
Total Gross Paid
(Sum of boxes 4, 5, and 6)
Repayments
Federal Income Tax
Withheld
Rate of Tax Country
12.
Medicare Premium Total
2016
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are a nonresident alien, an entry in this box indicates the
rate at which tax was withheld on the NSSEB, tier 2, VDB,
and supplemental annuity payments that were paid to you
in 2016. If you are a nonresident alien whose tax was with-
held at more than one rate during 2016, you will receive a
separate Form RRB-1099-R for each rate change during
2016.
Box 11—Country. If you are taxed as a U.S. citizen or
resident alien, this box doesn't apply to you. If you are a
nonresident alien, an entry in this box indicates the coun-
try of which you were a resident for tax purposes at the
time you received railroad retirement payments in 2016. If
you are a nonresident alien who was a resident of more
than one country during 2016, you will receive a separate
Form RRB-1099-R for each country of residence during
2016.
Box 12—Medicare Premium Total. This is for infor-
mation purposes only. The amount shown in this box rep-
resents the total amount of Part B Medicare premiums de-
ducted from your railroad retirement annuity payments in
2016. Medicare premium refunds aren't included in the
Medicare total. The Medicare total is normally shown on
Form RRB-1099 (if you are a citizen or resident alien of
the United States) or Form RRB-1042S (if you are a non-
resident alien). However, if Form RRB-1099 or Form
RRB-1042S isn't required for 2016, then this total will be
shown on Form RRB-1099-R. If your Medicare premiums
were deducted from your social security benefits, paid by
a third party, refunded to you, and/or you paid the premi-
ums by direct billing, your Medicare total won't be shown
in this box.
Repayment of benefits received in an earlier year. If
you had to repay any railroad retirement benefits that you
had included in your income in an earlier year because at
that time you thought you had an unrestricted right to it,
you can deduct the amount you repaid in the year in which
you repaid it.
If you repaid $3,000 or less in 2016, deduct it on
Schedule A (Form 1040), line 23. The 2%-of-adjus-
ted-gross-income limit applies to this deduction. You can't
take this deduction if you file Form 1040A.
If you repaid more than $3,000 in 2016, you can either
take a deduction for the amount repaid on Schedule A
(Form 1040), line 28 or you can take a credit against your
tax. For more information, see Repayments in Pub. 525.
Withholding Tax
and Estimated Tax
Your retirement plan distributions are subject to federal in-
come tax withholding. However, you can choose not to
have tax withheld on payments you receive unless they
are eligible rollover distributions. (These are distributions,
described later under Rollovers, that are eligible for roll-
over treatment but aren't paid directly to another qualified
retirement plan or to a traditional IRA.) If you choose not to
have tax withheld or if you don't have enough tax withheld,
you may have to make estimated tax payments. See Esti
mated tax, later.
The withholding rules apply to the taxable part of pay-
ments you receive from:
An employer pension, annuity, profit-sharing, or stock
bonus plan,
Any other deferred compensation plan,
A traditional individual retirement arrangement (IRA),
or
A commercial annuity.
For this purpose, a commercial annuity means an annuity,
endowment, or life insurance contract issued by an insur-
ance company.
There will be no withholding on any part of a dis
tribution where it is reasonable to believe that it
won't be includible in gross income.
Choosing no withholding. You can choose not to have
income tax withheld from retirement plan payments unless
they are eligible rollover distributions. You can make this
choice on Form W-4P for periodic and nonperiodic pay-
ments. This choice generally remains in effect until you re-
voke it.
The payer will ignore your choice not to have tax with-
held if:
You don't give the payer your social security number
(in the required manner), or
The IRS notifies the payer, before the payment is
made, that you gave an incorrect social security num-
ber.
To choose not to have tax withheld, a U.S. citizen or
resident alien must give the payer a home address in the
United States or its possessions. Without that address,
the payer must withhold tax. For example, the payer has
to withhold tax if the recipient has provided a U.S. address
for a nominee, trustee, or agent to whom the benefits are
delivered, but hasn't provided his or her own U.S. home
address.
If you don't give the payer a home address in the Uni-
ted States or its possessions, you can choose not to have
tax withheld only if you certify to the payer that you aren't a
U.S. citizen, a U.S. resident alien, or someone who left the
country to avoid tax. But if you so certify, you may be sub-
ject to the 30% flat rate withholding that applies to nonres-
ident aliens. This 30% rate won't apply if you are exempt
or subject to a reduced rate by treaty. For details, get Pub.
519.
Periodic payments. Unless you choose no withholding,
your annuity or similar periodic payments (other than eligi-
ble rollover distributions) will be treated like wages for
withholding purposes. Periodic payments are amounts
paid at regular intervals (such as weekly, monthly, or
yearly) for a period of time greater than 1 year (such as for
15 years or for life). You should give the payer a comple-
ted withholding certificate (Form W-4P or a similar form
provided by the payer). If you don't, tax will be withheld as
if you were married and claiming three withholding allow-
ances.
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Tax will be withheld as if you were single and were
claiming no withholding allowances if:
You don't give the payer your social security number
(in the required manner), or
The IRS notifies the payer (before any payment is
made) that you gave an incorrect social security num-
ber.
You must file a new withholding certificate to change
the amount of withholding.
Nonperiodic distributions. Unless you choose no with-
holding, the withholding rate for a nonperiodic distribution
(a payment other than a periodic payment) that isn't an eli-
gible rollover distribution is 10% of the distribution. You
can also ask the payer to withhold an additional amount
using Form W-4P. The part of any loan treated as a distri-
bution (except an offset amount to repay the loan), ex-
plained later, is subject to withholding under this rule.
Eligible rollover distribution. If you receive an eligible
rollover distribution, 20% of it generally will be withheld for
income tax. You can't choose not to have tax withheld
from an eligible rollover distribution. However, tax won't be
withheld if you have the plan administrator pay the eligible
rollover distribution directly to another qualified plan or an
IRA in a direct rollover. For more information about eligible
rollover distributions, see Rollovers, later.
Estimated tax. Your estimated tax is the total of your ex-
pected income tax, self-employment tax, and certain other
taxes for the year, minus your expected credits and with-
held tax. Generally, you must make estimated tax pay-
ments for 2017 if you expect to owe at least $1,000 in tax
(after subtracting your withholding and credits) and you
expect your withholding and credits to be less than the
smaller of:
1. 90% of the tax to be shown on your 2017 return, or
2. 100% of the tax shown on your 2016 return.
If your adjusted gross income for 2016 was more than
$150,000 ($75,000 if your filing status for 2017 is married
filing separately), substitute 110% for 100% in (2) above.
For more information, get Pub. 505, Tax Withholding and
Estimated Tax.
In figuring your withholding or estimated tax, re
member that a part of your monthly social security
or equivalent tier 1 railroad retirement benefits
may be taxable. See Pub. 915. You can choose to have
income tax withheld from those benefits. Use Form W4V
to make this choice.
Cost (Investment
in the Contract)
Distributions from your pension or annuity plan may in-
clude amounts treated as a recovery of your cost (invest-
ment in the contract). If any part of a distribution is treated
TIP
as a recovery of your cost under the rules explained in this
publication, that part is tax free. Therefore, the first step in
figuring how much of a distribution is taxable is to deter-
mine the cost of your pension or annuity.
In general, your cost is your net investment in the con-
tract as of the annuity starting date (or the date of the dis-
tribution, if earlier). To find this amount, you must first fig-
ure the total premiums, contributions, or other amounts
you paid. This includes the amounts your employer con-
tributed that were taxable to you when paid. (However,
see Foreign employment contributions, later.) It doesn't in-
clude amounts withheld from your pay on a tax-deferred
basis (money that was taken out of your gross pay before
taxes were deducted). It also doesn't include amounts you
contributed for health and accident benefits (including any
additional premiums paid for double indemnity or disability
benefits).
From this total cost you must subtract the following
amounts.
1. Any refunded premiums, rebates, dividends, or unre-
paid loans that weren't included in your income and
that you received by the later of the annuity starting
date or the date on which you received your first pay-
ment.
2. Any other tax-free amounts you received under the
contract or plan by the later of the dates in (1).
3. If you must use the Simplified Method for your annuity
payments, the tax-free part of any single-sum pay-
ment received in connection with the start of the an-
nuity payments, regardless of when you received it.
(See Simplified Method, later, for information on its re-
quired use.)
4. If you use the General Rule for your annuity pay-
ments, the value of the refund feature in your annuity
contract. (See General Rule, later, for information on
its use.) Your annuity contract has a refund feature if
the annuity payments are for your life (or the lives of
you and your survivor) and payments in the nature of
a refund of the annuity's cost will be made to your
beneficiary or estate if all annuitants die before a sta-
ted amount or a stated number of payments are
made. For more information, see Pub. 939.
The tax treatment of the items described in (1) through (3)
is discussed later under Taxation of Nonperiodic Pay
ments.
Form 1099R. If you began receiving periodic
payments of a life annuity in 2016, the payer
should show your total contributions to the plan in
box 9b of your 2016 Form 1099R.
Annuity starting date defined. Your annuity starting
date is the later of the first day of the first period for which
you received a payment or the date the plan's obligations
became fixed.
Example. On January 1, you completed all your pay-
ments required under an annuity contract providing for
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monthly payments starting on August 1 for the period be-
ginning July 1. The annuity starting date is July 1. This is
the date you use in figuring the cost of the contract and
selecting the appropriate number from Table 1 for line 3 of
the Simplified Method Worksheet.
Designated Roth accounts. Your cost in these ac-
counts is your designated Roth contributions that were in-
cluded in your income as wages subject to applicable
withholding requirements. Your cost will also include any
in-plan Roth rollovers you included in income.
Foreign employment contributions. If you worked
abroad, your cost may include contributions by your em-
ployer to the retirement plan, but only if those contribu-
tions would be excludible from your gross income had
they been paid directly to you as compensation. The con-
tributions that apply are:
1. Contributions before 1963 by your employer,
2. Contributions after 1962 by your employer if the con-
tributions would be excludible from your gross income
(not including the foreign earned income exclusion)
had they been paid directly to you, or
3. Contributions after 1996 by your employer if you per-
formed the services of a foreign missionary (a duly or-
dained, commissioned, or licensed minister of a
church or a lay person) but only if the contributions
would be excludible from your gross income had they
been paid directly to you.
Foreign employment contributions while a nonres
ident alien. In determining your cost, special rules apply
if you are a U.S. citizen or resident alien who received dis-
tributions in 2016 from a plan to which contributions were
made while you were a nonresident alien. Your contribu-
tions and your employer's contributions aren't included in
your cost if the contribution:
Was made based on compensation which was for
services performed outside the United States while
you were a nonresident alien, and
Wasn't subject to income tax under the laws of the
United States or any foreign country, but only if the
contribution would have been subject to income tax if
paid as cash compensation when the services were
performed.
Taxation of
Periodic Payments
This section explains how the periodic payments you re-
ceive from a pension or annuity plan are taxed. Periodic
payments are amounts paid at regular intervals (such as
weekly, monthly, or yearly) for a period of time greater
than 1 year (such as for 15 years or for life). These pay-
ments are also known as amounts received as an annuity.
If you receive an amount from your plan that isn't a peri-
odic payment, see Taxation of Nonperiodic Payments,
later.
In general, you can recover the cost of your pension or
annuity tax free over the period you are to receive the pay-
ments. The amount of each payment that is more than the
part that represents your cost is taxable (however, see In
surance Premiums for Retired Public Safety Officers, ear-
lier).
Designated Roth accounts. If you receive a qualified
distribution from a designated Roth account, the distribu-
tion isn't included in your gross income. This applies to
both your cost in the account and income earned on that
account. A qualified distribution is generally a distribution
that is:
Made after a 5-tax-year period of participation, and
Made on or after the date you reach age 5912, made to
a beneficiary or your estate on or after your death, or
attributable to your being disabled.
If the distribution isn't a qualified distribution, the rules
discussed in this section apply. The designated Roth ac-
count is treated as a separate contract.
Period of participation. The 5-tax-year period of par-
ticipation is the 5-tax-year period beginning with the first
tax year for which the participant made a designated Roth
contribution to the plan. Therefore, for designated Roth
contributions made for 2016, the first year for which a
qualified distribution can be made is 2021.
However, if a direct rollover is made to the plan from a
designated Roth account under another plan, the
5-tax-year period for the recipient plan begins with the first
tax year for which the participant first had designated Roth
contributions made to the other plan.
Your 401(k), 403(b), or 457(b) plan may permit you to
roll over amounts from those plans to a designated Roth
account within the same plan. This is known as an in-plan
Roth rollover. For more details, see Inplan Roth rollovers,
later.
Fully Taxable Payments
The pension or annuity payments that you receive are fully
taxable if you have no cost in the contract because any of
the following situations applies to you (however, see In
surance Premiums for Retired Public Safety Officers, ear-
lier).
You didn't pay anything or aren't considered to have
paid anything for your pension or annuity. Amounts
withheld from your pay on a tax-deferred basis aren't
considered part of the cost of the pension or annuity
payment.
Your employer didn't withhold contributions from your
salary.
You got back all of your contributions tax free in prior
years (however, see Exclusion not limited to cost un-
der Partly Taxable Payments, later).
Report the total amount you received on Form 1040,
line 16b; Form 1040A, line 12b; or on Form 1040NR,
line 17b. You should make no entry on Form 1040,
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line 16a; Form 1040A, line 12a; or Form 1040NR,
line 17a.
Deductible voluntary employee contributions. Distri-
butions you receive that are based on your accumulated
deductible voluntary employee contributions are generally
fully taxable in the year distributed to you. Accumulated
deductible voluntary employee contributions include net
earnings on the contributions. If distributed as part of a
lump sum, they don't qualify for the 10-year tax option or
capital gain treatment, explained later.
Partly Taxable Payments
If you have a cost to recover from your pension or annuity
plan (see Cost (Investment in the Contract), earlier), you
can exclude part of each annuity payment from income as
a recovery of your cost. This tax-free part of the payment
is figured when your annuity starts and remains the same
each year, even if the amount of the payment changes.
The rest of each payment is taxable (however, see Insur
ance Premiums for Retired Public Safety Officers, earlier).
You figure the tax-free part of the payment using one of
the following methods.
Simplified Method. You generally must use this
method if your annuity is paid under a qualified plan (a
qualified employee plan, a qualified employee annuity,
or a tax-sheltered annuity plan or contract). You can't
use this method if your annuity is paid under a non-
qualified plan.
General Rule. You must use this method if your an-
nuity is paid under a nonqualified plan. You generally
can't use this method if your annuity is paid under a
qualified plan.
You determine which method to use when you first begin
receiving your annuity, and you continue using it each
year that you recover part of your cost.
If you had more than one partly taxable pension or an-
nuity, figure the tax-free part and the taxable part of each
separately.
Qualified plan annuity starting before November 19,
1996. If your annuity is paid under a qualified plan and
your annuity starting date (defined earlier under Cost (In
vestment in the Contract)) is after July 1, 1986, and before
November 19, 1996, you could have chosen to use either
the Simplified Method or the General Rule. If your annuity
starting date is before July 2, 1986, you use the General
Rule unless your annuity qualified for the Three-Year
Rule. If you used the Three-Year Rule (which was re-
pealed for annuities starting after July 1, 1986), your annu-
ity payments are generally now fully taxable.
Exclusion limit. Your annuity starting date determines
the total amount of annuity payments that you can exclude
from income over the years. Once your annuity starting
date is determined, it doesn't change. If you calculate the
taxable portion of your annuity payments using the simpli-
fied method worksheet, the annuity starting date deter-
mines the recovery period for your cost. That recovery pe-
riod begins on your annuity starting date and isn't affected
by the date you first complete the worksheet.
Exclusion limited to cost. If your annuity starting
date is after 1986, the total amount of annuity income that
you can exclude over the years as a recovery of the cost
can't exceed your total cost. Any unrecovered cost at your
(or the last annuitant's) death is allowed as a miscellane-
ous itemized deduction on the final return of the decedent.
This deduction isn't subject to the 2%-of-adjus-
ted-gross-income limit.
Example 1. Your annuity starting date is after 1986,
and you exclude $100 a month ($1,200 a year) under the
Simplified Method. The total cost of your annuity is
$12,000. Your exclusion ends when you have recovered
your cost tax free, that is, after 10 years (120 months). Af-
ter that, your annuity payments are generally fully taxable.
Example 2. The facts are the same as in Example 1,
except you die (with no surviving annuitant) after the
eighth year of retirement. You have recovered tax free
only $9,600 (8 × $1,200) of your cost. An itemized deduc-
tion for your unrecovered cost of $2,400 ($12,000
$9,600) can be taken on your final return.
Exclusion not limited to cost. If your annuity starting
date is before 1987, you can continue to take your
monthly exclusion for as long as you receive your annuity.
If you chose a joint and survivor annuity, your survivor can
continue to take the survivor's exclusion figured as of the
annuity starting date. The total exclusion may be more
than your cost.
Simplified Method
Under the Simplified Method, you figure the tax-free part
of each annuity payment by dividing your cost by the total
number of anticipated monthly payments. For an annuity
that is payable for the lives of the annuitants, this number
is based on the annuitants' ages on the annuity starting
date and is determined from a table. For any other annu-
ity, this number is the number of monthly annuity pay-
ments under the contract.
Who must use the Simplified Method. You must use
the Simplified Method if your annuity starting date is after
November 18, 1996, and you meet both of the following
conditions.
1. You receive your pension or annuity payments from
any of the following plans.
a. A qualified employee plan.
b. A qualified employee annuity.
c. A tax-sheltered annuity plan (403(b) plan).
2. On your annuity starting date, at least one of the fol-
lowing conditions applies to you.
a. You are under age 75.
b. You are entitled to less than 5 years of guaranteed
payments.
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Guaranteed payments. Your annuity contract pro-
vides guaranteed payments if a minimum number of pay-
ments or a minimum amount (for example, the amount of
your investment) is payable even if you and any survivor
annuitant don't live to receive the minimum. If the mini-
mum amount is less than the total amount of the pay-
ments you are to receive, barring death, during the first 5
years after payments begin (figured by ignoring any pay-
ment increases), you are entitled to less than 5 years of
guaranteed payments.
Annuity starting before November 19, 1996. If your
annuity starting date is after July 1, 1986, and before No-
vember 19, 1996, and you chose to use the Simplified
Method, you must continue to use it each year that you re-
cover part of your cost. You could have chosen to use the
Simplified Method if your annuity is payable for your life
(or the lives of you and your survivor annuitant) and you
met both of the conditions listed earlier under Who must
use the Simplified Method.
Who can't use the Simplified Method. You can't use
the Simplified Method if you receive your pension or annu-
ity from a nonqualified plan or otherwise don't meet the
conditions described in the preceding discussion. See
General Rule, later.
How to use the Simplified Method. Complete Work-
sheet A in the back of this publication to figure your taxa-
ble annuity for 2016. Be sure to keep the completed work-
sheet; it will help you figure your taxable annuity next year.
To complete line 3 of the worksheet, you must deter-
mine the total number of expected monthly payments for
your annuity. How you do this depends on whether the an-
nuity is for a single life, multiple lives, or a fixed period. For
this purpose, treat an annuity that is payable over the life
of an annuitant as payable for that annuitant's life even if
the annuity has a fixed-period feature or also provides a
temporary annuity payable to the annuitant's child under
age 25.
You don't need to complete line 3 of the work
sheet or make the computation on line 4 if you re
ceived annuity payments last year and used last
year's worksheet to figure your taxable annuity. Instead,
enter the amount from line 4 of last year's worksheet on
line 4 of this year's worksheet.
Singlelife annuity. If your annuity is payable for your
life alone, use Table 1 at the bottom of the worksheet to
determine the total number of expected monthly pay-
ments. Enter on line 3 the number shown for your age on
your annuity starting date. This number will differ depend-
ing on whether your annuity starting date is before No-
vember 19, 1996, or after November 18, 1996.
Multiplelives annuity. If your annuity is payable for
the lives of more than one annuitant, use Table 2 at the
bottom of the worksheet to determine the total number of
expected monthly payments. Enter on line 3 the number
shown for the annuitants' combined ages on the annuity
starting date. For an annuity payable to you as the primary
annuitant and to more than one survivor annuitant,
TIP
combine your age and the age of the youngest survivor
annuitant. For an annuity that has no primary annuitant
and is payable to you and others as survivor annuitants,
combine the ages of the oldest and youngest annuitants.
Don't treat as a survivor annuitant anyone whose entitle-
ment to payments depends on an event other than the pri-
mary annuitant's death.
However, if your annuity starting date is before 1998,
don't use Table 2 and don't combine the annuitants' ages.
Instead, you must use Table 1 at the bottom of the work-
sheet and enter on line 3 the number shown for the pri-
mary annuitant's age on the annuity starting date. This
number will differ depending on whether your annuity
starting date is before November 19, 1996, or after No-
vember 18, 1996.
Fixedperiod annuity. If your annuity doesn't depend
in whole or in part on anyone's life expectancy, the total
number of expected monthly payments to enter on line 3
of the worksheet is the number of monthly annuity pay-
ments under the contract.
Line 6. The amount on line 6 should include all
amounts that could have been recovered in prior years. If
you didn't recover an amount in a prior year, you may be
able to amend your returns for the affected years.
Example. Bill Smith, age 65, began receiving retire-
ment benefits in 2016 under a joint and survivor annuity.
Bill's annuity starting date is January 1, 2016. The benefits
are to be paid for the joint lives of Bill and his wife, Kathy,
age 65. Bill had contributed $31,000 to a qualified plan
and had received no distributions before the annuity start-
ing date. Bill is to receive a retirement benefit of $1,200 a
month, and Kathy is to receive a monthly survivor benefit
of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable
annuity because his payments are from a qualified plan
and he is under age 75. Because his annuity is payable
over the lives of more than one annuitant, he uses his and
Kathy's combined ages and Table 2 at the bottom of
Worksheet A in completing line 3 of the worksheet. His
completed worksheet is shown later.
Bill's tax-free monthly amount is $100 ($31,000 ÷ 310)
as shown on line 4 of the worksheet. Upon Bill's death, if
Bill hasn't recovered the full $31,000 investment, Kathy
will also exclude $100 from her $600 monthly payment.
The full amount of any annuity payments received after
310 payments are paid must be included in gross income.
If Bill and Kathy die before 310 payments are made, a
miscellaneous itemized deduction will be allowed for the
unrecovered cost on the final income tax return of the last
to die. This deduction isn’t subject to the 2%-of-adjus-
ted-gross-income limit.
Multiple annuitants. If you and one or more other annui-
tants receive payments at the same time, you exclude
from each annuity payment a pro rata share of the
monthly tax-free amount. Figure your share by taking the
following steps.
1. Complete your worksheet through line 4 to figure the
monthly tax-free amount.
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Worksheet A. Simplified Method Worksheet for Bill Smith
Keep for Your Records
1. Enter the total pension or annuity payments received this year. Also, add this amount to the total
for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a ................... 1. $ 14,400
2. Enter your cost in the plan (contract) at the annuity starting date plus any death benefit
exclusion.* See Cost (Investment in the Contract), earlier ................................. 2. 31,000
Note. If your annuity starting date was before this year and you completed this worksheet last
year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below (even if
the amount of your pension or annuity has changed). Otherwise, go to line 3.
3. Enter the appropriate number from Table 1 below. But if your annuity starting date was after
1997 and the payments are for your life and that of your beneficiary, enter the appropriate
number from Table 2 below ........................................................... 3. 310
4. Divide line 2 by the number on line 3 .................................................... 4. 100
5. Multiply line 4 by the number of months for which this year's payments were made. If your
annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10,
and 11. Otherwise, go to line 6 ......................................................... 5. 1,200
6. Enter any amount previously recovered tax free in years after 1986. This is the amount shown
on line 10 of your worksheet for last year ................................................ 6. -0-
7. Subtract line 6 from line 2 ............................................................. 7. 31,000
8. Enter the smaller of line 5 or line 7 ...................................................... 8. 1,200
9. Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero.
Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form
1040NR, line 17b. Note: If your Form 1099-R shows a larger taxable amount, use the amount
figured on this line instead. If you are a retired public safety officer, see Insurance Premiums for
Retired Public Safety Officers, earlier, before entering an amount on your tax return .......... 9. $ 13,200
10. Was your annuity starting date before 1987?
Yes. STOP. Don't complete the rest of this worksheet.
No. Add lines 6 and 8. This is the amount you have recovered tax free through 2016. You will
need this number if you need to fill out this worksheet next year ............................ 10. 1,200
11. Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you won't have to
complete this worksheet next year. The payments you receive next year will generally be fully
taxable ............................................................................. 11. $ 29,800
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
Table 1 for Line 3 Above
AND your annuity starting date was—
IF the age at annuity
starting date was...
BEFORE November 19,
1996, enter on line 3...
AFTER November 18,
1996, enter on line 3...
55 or under 300 360
56-60 260 310
61-65 240 260
66-70 170 210
71 or older 120 160
Table 2 for Line 3 Above
IF the combined ages at
annuity starting date were...
THEN enter
on line 3...
110 or under 410
111-120 360
121-130 310
131-140 260
141 or older 210
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2. Divide the amount of your monthly payment by the to-
tal amount of the monthly payments to all annuitants.
3. Multiply the amount on line 4 of your worksheet by the
amount figured in (2) above. The result is your share
of the monthly tax-free amount.
Replace the amount on line 4 of the worksheet with the
result in (3) above. Enter that amount on line 4 of your
worksheet each year.
General Rule
Under the General Rule, you determine the tax-free part of
each annuity payment based on the ratio of the cost of the
contract to the total expected return. Expected return is
the total amount you and other eligible annuitants can ex-
pect to receive under the contract. To figure it, you must
use life expectancy (actuarial) tables prescribed by the
IRS.
Who must use the General Rule. You must use the
General Rule if you receive pension or annuity payments
from:
A nonqualified plan (such as a private annuity, a pur-
chased commercial annuity, or a nonqualified em-
ployee plan), or
A qualified plan if you are age 75 or older on your an-
nuity starting date and your annuity payments are
guaranteed for at least 5 years.
Annuity starting before November 19, 1996. If your
annuity starting date is after July 1, 1986, and before No-
vember 19, 1996, you had to use the General Rule for ei-
ther circumstance just described. You also had to use it
for any fixed-period annuity. If you didn't have to use the
General Rule, you could have chosen to use it. If your an-
nuity starting date is before July 2, 1986, you had to use
the General Rule unless you could use the Three-Year
Rule.
If you had to use the General Rule (or chose to use it),
you must continue to use it each year that you recover
your cost.
Who can't use the General Rule. You can't use the
General Rule if you receive your pension or annuity from a
qualified plan and none of the circumstances described in
the preceding discussions apply to you. See Simplified
Method, earlier.
More information. For complete information on using
the General Rule, including the actuarial tables you need,
see Pub. 939.
Taxation of
Nonperiodic Payments
This section of the publication explains how any nonperi-
odic distributions you receive under a pension or annuity
plan are taxed. Nonperiodic distributions are also known
as amounts not received as an annuity. They include all
payments other than periodic payments and corrective
distributions.
For example, the following items are treated as non-
periodic distributions.
Cash withdrawals.
Distributions of current earnings (dividends) on your
investment. However, don't include these distributions
in your income to the extent the insurer keeps them to
pay premiums or other consideration for the contract.
Certain loans. See Loans Treated as Distributions,
later.
The value of annuity contracts transferred without full
and adequate consideration. See Transfers of Annuity
Contracts, later.
Corrective distributions of excess plan contribu-
tions. Generally, if the contributions made for you during
the year to certain retirement plans exceed certain limits,
the excess is taxable to you. To correct an excess, your
plan may distribute it to you (along with any income
earned on the excess). Although the plan reports the cor-
rective distributions on Form 1099-R, the distribution isn't
treated as a nonperiodic distribution from the plan. It isn't
subject to the allocation rules explained in the following
discussion, it can't be rolled over into another plan, and it
isn't subject to the additional tax on early distributions.
If your retirement plan made a corrective distribu
tion of excess amounts (excess deferrals, excess
contributions, or excess annual additions), your
Form 1099R should have the code “8,” “B,” “P,” or “E” in
box 7.
For information on plan contribution limits and how to
report corrective distributions of excess contributions, see
Retirement Plan Contributions under Employee Compen
sation in Pub. 525.
Figuring the Taxable Amount
How you figure the taxable amount of a nonperiodic distri-
bution depends on whether it is made before the annuity
starting date, or on or after the annuity starting date. If it is
made before the annuity starting date, its tax treatment
also depends on whether it is made under a qualified or
nonqualified plan. If it is made under a nonqualified plan,
its tax treatment depends on whether it fully discharges
the contract, is received under certain life insurance or en-
dowment contracts, or is allocable to an investment you
made before August 14, 1982.
You may be able to roll over the taxable amount
of a nonperiodic distribution from a qualified re
tirement plan into another qualified retirement
plan or a traditional IRA tax free. See Rollovers, later. If
you don't make a taxfree rollover and the distribution
qualifies as a lumpsum distribution, you may be able to
elect an optional method of figuring the tax on the taxable
amount. See Lump-Sum Distributions, later.
TIP
TIP
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Annuity starting date. The annuity starting date is either
the first day of the first period for which you receive an an-
nuity payment under the contract or the date on which the
obligation under the contract becomes fixed, whichever is
later.
Distributions of employer securities. If you receive a
distribution of employer securities from a qualified retire-
ment plan, you may be able to defer the tax on the net un-
realized appreciation (NUA) in the securities. The NUA is
the net increase in the securities' value while they were in
the trust. This tax deferral applies to distributions of the
employer corporation's stocks, bonds, registered deben-
tures, and debentures with interest coupons attached.
If the distribution is a lump-sum distribution, tax is de-
ferred on all of the NUA unless you choose to include it in
your income for the year of the distribution.
A lump-sum distribution for this purpose is the distribu-
tion or payment of a plan participant's entire balance
(within a single tax year) from all of the employer's quali-
fied plans of one kind (pension, profit-sharing, or stock bo-
nus plans), but only if paid:
Because of the plan participant's death,
After the participant reaches age 5912,
Because the participant, if an employee, separates
from service, or
After the participant, if a self-employed individual, be-
comes totally and permanently disabled.
If you choose to include NUA in your income for
the year of the distribution and the participant was
born before January 2, 1936, you may be able to
figure the tax on the NUA using the optional methods de
scribed under Lump-Sum Distributions, later.
If the distribution isn't a lump-sum distribution, tax is de-
ferred only on the NUA resulting from employee contribu-
tions other than deductible voluntary employee contribu-
tions.
The NUA on which tax is deferred should be shown in
box 6 of the Form 1099-R you receive from the payer of
the distribution.
When you sell or exchange employer securities with
tax-deferred NUA, any gain is long-term capital gain up to
the amount of the NUA that isn’t included in your basis in
the employer securities. Any gain that is more than the
NUA is long-term or short-term gain, depending on how
long you held the securities after the distribution.
Your basis in the employer securities is the total of the
following amounts.
Your contributions to the plan that are attributable to
the securities.
Your employer's contributions that were taxed as ordi-
nary income in the year the securities were distrib-
uted.
Your NUA in the securities that is attributable to em-
ployer contributions and taxed as ordinary income in
the year the securities were distributed.
TIP
How to report. Enter the total amount of a nonperiodic
distribution on Form 1040, line 16a; Form 1040A, line 12a;
or Form 1040NR, line 17a. Enter the taxable amount of
the distribution on Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR, line 17b. However, if you make
a tax-free rollover or elect an optional method of figuring
the tax on a lump-sum distribution, see How to report in
the discussions of those tax treatments, later.
Distribution On or After
Annuity Starting Date
If you receive a nonperiodic payment from your annuity
contract on or after the annuity starting date, you generally
must include all of the payment in gross income. For ex-
ample, a cost-of-living increase in your pension after the
annuity starting date is an amount not received as an an-
nuity and, as such, is fully taxable.
Reduction in subsequent payments. If the annuity
payments you receive are reduced because you received
a nonperiodic distribution, you can exclude part of the
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 contract, multiplied by a fraction. The numerator is the
reduction in each annuity payment because of the non-
periodic distribution. The denominator is the full unre-
duced amount of each annuity payment originally provi-
ded for.
Single-sum in connection with the start of annuity
payments. If you receive a single-sum payment on or af-
ter your annuity starting date in connection with the start of
annuity payments for which you must use the Simplified
Method, treat the single-sum payment as if it were re-
ceived before your annuity starting date. (See Simplified
Method under Taxation of Periodic Payments, earlier, for
information on its required use.) Follow the rules dis-
cussed under Distribution Before Annuity Starting Date
From a Qualified Plan, later.
Distribution in full discharge of contract. You may re-
ceive an amount on or after the annuity starting date that
fully satisfies the payer's obligation under the contract.
The amount may be a refund of what you paid for the con-
tract or for the complete surrender, redemption, or matur-
ity of the contract. Include the amount in gross income
only to the extent that it exceeds the remaining cost of the
contract.
Distribution Before Annuity Starting Date
From a Qualified Plan
If you receive a nonperiodic distribution before the annuity
starting date from a qualified retirement plan, you gener-
ally can allocate only part of it to the cost of the contract.
You exclude from your gross income the part that you allo-
cate to the cost. You include the remainder in your gross
income.
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For this purpose, a qualified retirement plan is:
A qualified employee plan (or annuity contract pur-
chased by such a plan),
A qualified employee annuity plan, or
A tax-sheltered annuity plan (403(b) plan).
Use the following formula to figure the tax-free amount
of the distribution.
Amount
received xCost of contract =Tax-free
amount
Account balance
For this purpose, your account balance includes only
amounts to which you have a nonforfeitable right (a right
that can't be taken away).
Example. Ann Brown received a $50,000 distribution
from her retirement plan before her annuity starting date.
She had $10,000 invested (cost) in the plan. Her account
balance was $100,000. She can exclude $5,000 of the
$50,000 distribution, figured as follows:
$50,000 x $10,000 = $5,000
$100,000
Defined contribution plan. A defined contribution plan
is a plan in which you have an individual account. Your
benefits are based only on the amount contributed to the
account and the income, gains or losses, etc., which may
be allocated to that account. Under a defined contribution
plan, your contributions (and income allocable to those
contributions) may be treated as a separate contract for
figuring the taxable part of any distribution. The employer
contributions (and income allocable to those contribu-
tions) wouldn't be considered part of that separate con-
tract.
Example. Ryan participates in a defined contribution
plan that treats employee contributions and earnings allo-
cable to them as a separate contract. He received a
non-annuity distribution of $5,000 before his annuity start-
ing date. He had made after-tax contributions of $10,000.
The earnings allocable to his contributions were $2,500.
His employer also contributed $10,000. The earnings allo-
cable to the employer contributions were $2,500.
To determine the tax-free amount of Ryan's distribu-
tion, use the same formula shown above. However, be-
cause employee contributions are treated as a separate
contract, the account balance would be the total of Ryan's
contributions and allocable earnings.
Thus the tax-free amount would be $5,000 × ($10,000
÷ $12,500) = $4,000. The taxable amount would be
$1,000 ($5,000 − $4,000).
If the employee contributions weren't treated as a sepa-
rate contract, the tax-free amount would be $2,000
($5,000 × ($10,000 ÷ $25,000)) and the taxable amount
would be $3,000 ($5,000 − $2,000).
Plans that permitted withdrawal of employee contri-
butions. If you contributed before 1987 to a pension plan
that, as of May 5, 1986, permitted you to withdraw your
contributions before your separation from service, any dis-
tribution before your annuity starting date is tax free to the
extent that it, when added to earlier distributions received
after 1986, doesn't exceed your cost as of December 31,
1986. Apply the allocation described in the preceding dis-
cussion only to any excess distribution.
Distribution Before Annuity Starting Date
From a Nonqualified Plan
If you receive a nonperiodic distribution before the annuity
starting date from a plan other than a qualified retirement
plan (nonqualified plan), it is allocated first to earnings (the
taxable part) and then to the cost of the contract (the
tax-free part). This allocation rule applies, for example, to
a commercial annuity contract you bought directly from
the issuer. You include in your gross income the smaller
of:
The nonperiodic distribution, or
The amount by which the cash value of the contract
(figured without considering any surrender charge) im-
mediately before you receive the distribution exceeds
your investment in the contract at that time.
Example. You bought an annuity from an insurance
company. Before the annuity starting date under your an-
nuity contract, you received a $7,000 distribution. At the
time of the distribution, the annuity had a cash value of
$16,000 and your investment in the contract was $10,000.
The distribution is allocated first to earnings, so you must
include $6,000 ($16,000 $10,000) in your gross income.
The remaining $1,000 ($7,000 $6,000) is a tax-free re-
turn of part of your investment.
Exception to allocation rule. Certain nonperiodic distri-
butions received before the annuity starting date aren't
subject to the allocation rule in the preceding discussion.
Instead, you include the amount of the payment in gross
income only to the extent that it exceeds the cost of the
contract.
This exception applies to the following distributions.
Distributions in full discharge of a contract that you re-
ceive as a refund of what you paid for the contract or
for the complete surrender, redemption, or maturity of
the contract.
Distributions from life insurance or endowment con-
tracts (other than modified endowment contracts, as
defined in section 7702A of the Internal Revenue
Code) that aren't received as an annuity under the
contracts.
Distributions under contracts entered into before Au-
gust 14, 1982, to the extent that they are allocable to
your investment before August 14, 1982.
If you bought an annuity contract before August 14,
1982, and made investments both before and after August
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14, 1982, the distributed amounts are allocated to your
investment or to earnings in the following order.
1. The part of your investment that was made before Au-
gust 14, 1982. This part of the distribution is tax free.
2. The earnings on the part of your investment that was
made before August 14, 1982. This part of the distri-
bution is taxable.
3. The earnings on the part of your investment that was
made after August 13, 1982. This part of the distribu-
tion is taxable.
4. The part of your investment that was made after Au-
gust 13, 1982. This part of the distribution is tax free.
The taxable portion of distributions from nonquali
fied plans are subject to the net investment in
come tax. See the Instructions for Form 8960.
Distribution of U.S. savings bonds. If you receive U.S.
savings bonds in a taxable distribution from a retirement
or profit-sharing plan, report the value of the bonds at the
time of distribution as income. The value of the bonds in-
cludes accrued interest. When you cash the bonds, your
Form 1099-INT will show the total interest accrued, includ-
ing the part you reported when the bonds were distributed
to you. For information on how to adjust your interest in-
come for U.S. savings bond interest you previously repor-
ted, see How To Report Interest Income in chapter 1 of
Pub. 550, Investment Income and Expenses.
Loans Treated as Distributions
If you borrow money from your retirement plan, you must
treat the loan as a nonperiodic distribution from the plan
unless it qualifies for the exception to this loan-as-distribu-
tion rule explained later. This treatment also applies to any
loan under a contract purchased under your retirement
plan, and to the value of any part of your interest in the
plan or contract that you pledge or assign (or agree to
pledge or assign). It applies to loans from both qualified
and nonqualified plans, including commercial annuity con-
tracts you purchase directly from the issuer. Further, it ap-
plies if you renegotiate, extend, renew, or revise a loan
that qualified for the exception below if the altered loan
doesn't qualify. In that situation, you must treat the out-
standing balance of the loan as a distribution on the date
of the transaction.
You determine how much of the loan is taxable using
the allocation rules for nonperiodic distributions discussed
under Figuring the Taxable Amount, earlier. The taxable
part may be subject to the additional tax on early distribu-
tions. It isn't an eligible rollover distribution and doesn't
qualify for the 10-year tax option.
Exception for qualified plan, 403(b) plan, and gov-
ernment plan loans. At least part of certain loans under
a qualified employee plan, qualified employee annuity,
tax-sheltered annuity (403(b) plan), or government plan
isn't treated as a distribution from the plan. This exception
CAUTION
!
to the loan-as-distribution rule applies only to a loan that
either:
Is used to acquire your main home, or
Must be repaid within 5 years.
If a loan qualifies for this exception, you must treat it as
a nonperiodic distribution only to the extent that the loan,
when added to the outstanding balances of all your loans
from all plans of your employer (and certain related em-
ployers, defined later) exceeds the lesser of:
$50,000, or
Half the present value (but not less than $10,000) of
your nonforfeitable accrued benefit under the plan,
determined without regard to any accumulated deduc-
tible employee contributions.
You must reduce the $50,000 amount if you already
had an outstanding loan from the plan during the 1-year
period ending the day before you took out the loan. The
amount of the reduction is your highest outstanding loan
balance during that period minus the outstanding balance
on the date you took out the new loan. If this amount is
zero or less, ignore it.
Substantially level payments. To qualify for the ex-
ception to the loan-as-distribution rule, the loan must re-
quire substantially level payments at least quarterly over
the life of the loan. If the loan is from a designated Roth
account, the payments must be satisfied separately for
that part of the loan and for the part of the loan from other
accounts under the plan. This level payment requirement
doesn't apply to the period in which you are on a leave of
absence without pay or with a rate of pay that is less than
the required installment. Generally, this leave of absence
must not be longer than 1 year. You must repay the loan
within 5 years from the date of the loan (unless the loan
was used to acquire your main home). Your installment
payments after the leave ends must not be less than your
original payments.
However, if your plan suspends your loan payments for
any part of the period during which you are in the uni-
formed services, you won't be treated as having received
a distribution even if the suspension is for more than 1
year and the term of the loan is extended. The loan pay-
ments must resume upon completion of such period and
the loan must be repaid in substantially level installments
within 5 years from the date of the loan (unless the loan
was used to acquire your main home) plus the period of
suspension.
Example 1. On May 1, 2016, you borrowed $40,000
from your retirement plan. The loan was to be repaid in
level monthly installments over 5 years. The loan wasn't
used to acquire your main home. You make nine monthly
payments and start an unpaid leave of absence that lasts
for 12 months. You weren't in a uniformed service during
this period. After the leave period ends and you resume
active employment, you resume making repayments on
the loan. You must repay this loan by April 30, 2021 (5
years from the date of this loan). You can increase your
monthly installments or you can make the original monthly
installments and on April 30, 2021, pay the balance.
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Example 2. The facts are the same as in Example 1,
except that you are on a leave of absence performing
service in the uniformed services for 2 years. The loan
payments were suspended for that period. You must re-
sume making loan payments at the end of that period and
the loan must be repaid by April 30, 2023 (5 years from
the date of the loan plus the period of suspension, which
is 2 years in this example).
Related employers and related plans. In determin-
ing loan balances for purposes of applying the exception
to the loan-as-distribution rule, you must add the balances
of all your loans from all plans of your employer and from
all plans of your employers who are treated as a single
employer. Treat separate employers' plans as plans of a
single employer if they are treated that way under other
qualified retirement plan rules because the employers are
related.
Employers are related if they are:
Members of a controlled group of corporations,
Businesses under common control, or
Members of an affiliated service group.
An affiliated service group generally is two or more
service organizations whose relationship involves an own-
ership connection. Their relationship also includes the
regular or significant performance of services by one or-
ganization for or in association with another.
Denial of interest deduction. If the loan from a quali-
fied plan isn't treated as a distribution because the excep-
tion applies, you can't deduct any of the interest on the
loan during any period that:
The loan is secured by amounts from elective defer-
rals under a qualified cash or deferred arrangement
(section 401(k) plan) or a salary reduction agreement
to purchase a tax-sheltered annuity, or
You are a key employee as defined in section 416(i) of
the Internal Revenue Code.
Reporting by plan. If your loan is treated as a distribu-
tion, you should receive a Form 1099-R showing code “L”
in box 7.
Effect on investment in the contract. If your loan is
treated as a distribution, you must reduce your investment
in the contract to the extent that the distribution is tax free
under the allocation rules for qualified plans explained
earlier. Repayments of the loan increase your investment
in the contract to the extent that the distribution is taxable
under those rules.
If you receive a loan under a nonqualified plan other
than a 403(b) plan, including a commercial annuity con-
tract that you purchase directly from the issuer, you in-
crease your investment in the contract to the extent that
the distribution is taxable under the general allocation rule
for nonqualified plans explained earlier. Repayments of
the loan don't affect your investment in the contract. How-
ever, if the distribution is excepted from the general allo-
cation rule (for example, because it is made under a con-
tract entered into before August 14, 1982), you reduce
your investment in the contract to the extent that the distri-
bution is tax free and increase it for loan repayments to
the extent that the distribution is taxable.
Transfers of Annuity Contracts
If you transfer without full and adequate consideration an
annuity contract issued after April 22, 1987, you are
treated as receiving a nonperiodic distribution. The distri-
bution equals the excess of:
The cash surrender value of the contract at the time of
transfer, over
Your investment in the contract at that time.
This rule doesn't apply to transfers between spouses or
transfers between former spouses incident to a divorce.
Tax-free exchange. No gain or loss is recognized on an
exchange of an annuity contract for another annuity con-
tract if the insured or annuitant remains the same. How-
ever, if an annuity contract is exchanged for a life insur-
ance or endowment contract, any gain due to interest
accumulated on the contract is ordinary income.
If you transfer a full or partial interest in a tax-sheltered
annuity that isn't subject to restrictions on early distribu-
tions to another tax-sheltered annuity, the transfer quali-
fies for nonrecognition of gain or loss.
If you exchange an annuity contract issued by a life in-
surance company that is subject to a rehabilitation, con-
servatorship, or similar state proceeding for an annuity
contract issued by another life insurance company, the
exchange qualifies for nonrecognition of gain or loss. The
exchange is tax free even if the new contract is funded by
two or more payments from the old annuity contract. This
also applies to an exchange of a life insurance contract for
a life insurance, endowment, annuity, or qualified
long-term care insurance contract.
If you transfer part of the cash surrender value of an ex-
isting annuity contract for a new annuity contract issued
by another insurance company, the transfer qualifies for
nonrecognition of gain or loss. The funds must be trans-
ferred directly between the insurance companies. Your in-
vestment in the original contract immediately before the
exchange is allocated between the contracts based on the
percentage of the cash surrender value allocated to each
contract.
Example. You own an annuity contract issued by ABC
Insurance. You assign 60% of the cash surrender value of
that contract to DEF Insurance to purchase an annuity
contract. The funds are transferred directly between the
insurance companies. You don't recognize any gain or
loss on the transaction. After the exchange, your invest-
ment in the new contract is equal to 60% of your invest-
ment in the old contract immediately before the exchange.
Your investment in the old contract is equal to 40% of your
original investment in that contract.
Taxfree transfers for certain cash distributions. If
you receive cash from the surrender of one contract and
invest the cash in another contract, you generally don't
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have a tax-free transfer. However, you can elect to re-
ceive tax-free treatment for a cash distribution from an in-
surance company that is subject to a rehabilitation, con-
servatorship, insolvency, or similar state proceeding if all
of the following conditions are met.
You withdraw all the cash to which you are entitled.
You reinvest the proceeds within 60 days in a single
contract issued by another insurance company.
You assign all rights to any future distributions to the
new issuer if the cash distribution is restricted by the
state proceeding to an amount that is less than re-
quired for full settlement.
An exchange of these contracts would otherwise qual-
ify as a tax-free transfer.
You must give the new issuer a statement containing
the following information.
The amount of cash distributed under the old contract.
The amount of cash reinvested in the new contract.
Your investment in the old contract on the date of the
initial distribution.
You must also attach the following items to your timely
filed income tax return for the year of the initial distribution.
A copy of the statement you gave to the new issuer.
A statement that contains the words “ELECTION UN-
DER REV. PROC. 92-44,” the new issuer's name, and
the policy number or similar identifying information for
the new contract.
Tax-free exchange reported on Form 1099-R. If you
make a tax-free exchange of an annuity contract for an-
other annuity contract issued by a different company, the
exchange will be shown on Form 1099-R with a code “6”
in box 7. You need not report this on your tax return.
Date of purchase of contract received in a tax-free
exchange. If you acquire an annuity contract in a tax-free
exchange for another annuity contract, its date of pur-
chase is the date you purchased the annuity you ex-
changed. This rule applies for determining if the annuity
qualifies for exemption from the tax on early distributions
as an immediate annuity. See Tax on Early Distributions,
later.
Lump-Sum Distributions
This section on lumpsum distributions only ap
plies if the plan participant was born before Janu
ary 2, 1936. If the plan participant was born after
January 1, 1936, the taxable amount of this nonperiodic
payment is reported as discussed earlier.
A lump-sum distribution is the distribution or payment in 1
tax year of a plan participant's entire balance from all of
the employer's qualified plans of one kind (for example,
pension, profit-sharing, or stock bonus plans). Addition-
ally, a lump-sum distribution is a distribution that was paid:
Because of the plan participant's death,
TIP
After the participant reaches age 5912,
Because the participant, if an employee, separates
from service, or
After the participant, if a self-employed individual, be-
comes totally and permanently disabled.
A distribution from a nonqualified plan (such as a privately
purchased commercial annuity or a section 457 deferred
compensation plan of a state or local government or
tax-exempt organization) can't qualify as a lump-sum dis-
tribution.
The participant's entire balance from a plan doesn't in-
clude certain forfeited amounts. It also doesn't include any
deductible voluntary employee contributions allowed by
the plan after 1981 and before 1987.
If you receive a lump-sum distribution from a qualified
employee plan or qualified employee annuity and the plan
participant was born before January 2, 1936, you may be
able to elect optional methods of figuring the tax on the
distribution. The part from active participation in the plan
before 1974 may qualify as capital gain subject to a 20%
tax rate. The part from participation after 1973 (and any
part from participation before 1974 that you don't report as
capital gain) is ordinary income. You may be able to use
the 10-year tax option, discussed later, to figure tax on the
ordinary income part.
Each individual, estate, or trust who receives part of a
lump-sum distribution on behalf of a plan participant who
was born before January 2, 1936, can choose whether to
elect the optional methods for the part each received.
However, if two or more trusts receive the distribution, the
plan participant or the personal representative of a de-
ceased participant must make the choice.
Use Form 4972 to figure the separate tax on a
lump-sum distribution using the optional methods. The tax
figured on Form 4972 is added to the regular tax figured
on your other income. This may result in a smaller tax than
you would pay by including the taxable amount of the dis-
tribution as ordinary income in figuring your regular tax.
Alternate payee under qualified domestic relations
order. If you receive a distribution as an alternate payee
under a qualified domestic relations order (discussed ear-
lier under General Information), you may be able to
choose the optional tax computations for it. You can make
this choice for a distribution that would be treated as a
lump-sum distribution had it been received by your
spouse or former spouse (the plan participant). However,
for this purpose, the balance to your credit doesn't include
any amount payable to the plan participant.
If you choose an optional tax computation for a distribu-
tion received as an alternate payee, this choice won't af-
fect any election for distributions from your own plan.
More than one recipient. One or all of the recipients of
a lump-sum distribution can use the optional tax computa-
tions. See Multiple recipients of a lumpsum distribution in
the Instructions for Form 4972.
Reemployment. A separated employee's vested per-
centage in his or her retirement benefit may increase if he
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or she is rehired by the employer within 5 years following
separation from service. This possibility doesn't prevent a
distribution made before reemployment from qualifying as
a lump-sum distribution. However, if the employee elected
an optional method of figuring the tax on the distribution
and his or her vested percentage in the previous retire-
ment benefit increases after reemployment, the employee
must recapture the tax saved. This is done by increasing
the tax for the year in which the increase in vesting first
occurs.
Distributions that don't qualify. The following distribu-
tions don't qualify as lump-sum distributions for the capital
gain treatment or 10-year tax option.
The part of a distribution not rolled over if the distribu-
tion is partially rolled over to another qualified plan or
an IRA.
Any distribution if an earlier election to use either the
5- or 10-year tax option had been made after 1986 for
the same plan participant.
U.S. Retirement Plan Bonds distributed with a lump
sum.
Any distribution made during the first 5 tax years that
the participant was in the plan, unless it was made be-
cause the participant died.
The current actuarial value of any annuity contract in-
cluded in the lump sum. (Form 1099-R, box 8, should
show this amount, which you use only to figure tax on
the ordinary income part of the distribution.)
Any distribution to a 5% owner that is subject to penal-
ties under section 72(m)(5)(A) of the Internal Revenue
Code.
A distribution from an IRA.
A distribution from a tax-sheltered annuity (section
403(b) plan).
A distribution of the redemption proceeds of bonds
rolled over tax free to a qualified pension plan, etc.,
from a qualified bond purchase plan.
A distribution from a qualified plan if the participant or
his or her surviving spouse previously received an eli-
gible rollover distribution from the same plan (or an-
other plan of the employer that must be combined with
that plan for the lump-sum distribution rules) and the
previous distribution was rolled over tax free to an-
other qualified plan or an IRA.
A distribution from a qualified plan that received a roll-
over after 2001 from an IRA (other than a conduit
IRA), a governmental section 457 plan, or a section
403(b) tax-sheltered annuity on behalf of the plan par-
ticipant.
A distribution from a qualified plan that received a roll-
over after 2001 from another qualified plan on behalf
of that plan participant's surviving spouse.
A corrective distribution of excess deferrals, excess
contributions, excess aggregate contributions, or ex-
cess annual additions.
A lump-sum credit or payment from the Federal Civil
Service Retirement System (or the Federal Employ-
ees' Retirement System).
How to treat the distribution. If you receive a lump-sum
distribution, you may have the following options for how to
treat the taxable part.
Report the part of the distribution from participation
before 1974 as a capital gain (if you qualify) and the
part from participation after 1973 as ordinary income.
Report the part of the distribution from participation
before 1974 as a capital gain (if you qualify) and use
the 10-year tax option to figure the tax on the part from
participation after 1973 (if you qualify).
Use the 10-year tax option to figure the tax on the total
taxable amount (if you qualify).
Roll over all or part of the distribution. See Rollovers,
later. No tax is currently due on the part rolled over.
Report any part not rolled over as ordinary income.
Report the entire taxable part of the distribution as or-
dinary income on your tax return.
The first three options are explained in the following
discussions.
Electing optional lump-sum treatment. You can
choose to use the 10-year tax option or capital gain treat-
ment only once after 1986 for any plan participant. If you
make this choice, you can't use either of these optional
treatments for any future distributions for the participant.
Complete Form 4972 and attach it to your Form 1040 if
you choose to use one or both of the tax options. If you re-
ceived more than one lump-sum distribution for a plan
participant during the year, you must add them together in
your computation. If you and your spouse are filing a joint
return and you both have received a lump-sum distribu-
tion, each of you should complete a separate Form 4972.
Time for choosing. You must decide to use the tax
options before the end of the time, including extensions,
for making a claim for credit or refund of tax. This is usu-
ally 3 years after the date the return was filed or 2 years
after the date the tax was paid, whichever is later. (Re-
turns filed before their due date are considered filed on
their due date.)
Changing your mind. You can change your mind and
decide not to use the tax options within the time period
just discussed. If you change your mind, file Form 1040X,
Amended U.S. Individual Income Tax Return, with a state-
ment saying you don't want to use the optional lump-sum
treatment. Generally, you must pay any additional tax due
to the change with the Form 1040X.
How to report. If you elect capital gain treatment (but
not the 10-year tax option) for a lump-sum distribution, in-
clude the ordinary income part of the distribution on Form
1040, lines 16a and 16b, or on Form 1040NR, lines 17a
and 17b. Enter the capital gain part of the distribution in
Part II of Form 4972. Include the tax from Form 4972,
line 7 in the total on Form 1040, line 44, or on Form
1040NR, line 42.
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If you elect the 10-year tax option, don't include any
part of the distribution on Form 1040, lines 16a or 16b, or
on Form 1040NR, lines 17a or 17b. Report the entire dis-
tribution in Part III of Form 4972 or, if you also elect capital
gain treatment, report the capital gain part in Part II and
the ordinary income part in Part III. Include the tax from
Form 4972, line 30 in the total on Form 1040, line 44, or
on Form 1040NR, line 42.
Taxable and tax-free parts of the distribution. The
taxable part of a lump-sum distribution is the employer's
contributions and income earned on your account. You
may recover your cost in the lump sum and any net unre-
alized appreciation (NUA) in employer securities tax free.
Cost. In general, your cost is the total of:
The plan participant's nondeductible contributions to
the plan,
The plan participant's taxable costs of any life insur-
ance contract distributed,
Any employer contributions that were taxable to the
plan participant, and
Repayments of any loans that were taxable to the plan
participant.
You must reduce this cost by amounts previously distrib-
uted tax free.
Net unrealized appreciation (NUA). The NUA in em-
ployer securities (box 6 of Form 1099-R) received as part
of a lump-sum distribution is generally tax free until you
sell or exchange the securities. (See Distributions of em
ployer securities under Figuring the Taxable Amount, ear-
lier.) However, if you choose to include the NUA in your in-
come for the year of the distribution and there is an
amount in box 3 of Form 1099-R, part of the NUA will
qualify for capital gain treatment. Use the NUA Worksheet
in the instructions for Form 4972 to find the part that quali-
fies.
Losses. You may be able to claim a loss on your return if
you receive a lump-sum distribution that is less than the
plan participant's cost. You must receive the distribution
entirely in cash or worthless securities. The amount you
can claim is the difference between the participant's cost
and the amount of the cash distribution, if any.
To claim the loss, you must itemize deductions on
Schedule A (Form 1040). Show the loss as a miscellane-
ous deduction subject to the 2%-of-adjusted-gross-in-
come limit.
You can't claim a loss if you receive securities that
aren't worthless, even if the total value of the distribution is
less than the plan participant's cost. You recognize gain or
loss only when you sell or exchange the securities.
A loss under a nonqualified plan, such as a com
mercial variable annuity, is deductible in the same
manner as a lumpsum distribution.
TIP
Capital Gain Treatment
Capital gain treatment applies only to the taxable part of a
lump-sum distribution resulting from participation in the
plan before 1974. The amount treated as capital gain is
taxed at a 20% rate. You can elect this treatment only
once for any plan participant, and only if the plan partici-
pant was born before January 2, 1936.
Complete Part II of Form 4972 to choose the 20% capi-
tal gain election.
Figuring the capital gain and ordinary income parts.
Generally, figure the capital gain and ordinary income
parts of a lump-sum distribution by using the following for-
mulas.
Capital Gain:
Total Taxable
Amount ×Months of active participation before 1974
Total months of active participation
Ordinary Income:
Total Taxable
Amount ×Months of active participation after 1973
Total months of active participation
In figuring the months of active participation before
1974, count as 12 months any part of a calendar year in
which the plan participant actively participated under the
plan. For active participation after 1973, count as 1 month
any part of a calendar month in which the participant ac-
tively participated in the plan.
The capital gain part should be shown in box 3 of Form
1099-R or other statement given to you by the payer of the
distribution.
Reduction for federal estate tax. If any federal es-
tate tax (discussed under Survivors and Beneficiaries,
later) was paid on the lump-sum distribution, you must de-
crease the capital gain by the amount of estate tax appli-
cable to it. Follow the Form 4972 instructions for Part II,
line 6, to figure the part of the estate tax applicable to the
capital gain that is used to reduce the capital gain. If you
don't make the capital gain election, enter on line 18 of
Part III the estate tax attributable to the total lump-sum dis-
tribution. For information on how to figure the estate tax
attributable to the lump-sum distribution, get the Instruc-
tions for Form 706, United States Estate (and Genera-
tion-Skipping Transfer) Tax Return, or contact the admin-
istrator of the decedent's estate.
10-Year Tax Option
The 10-year tax option is a special formula used to figure
a separate tax on the ordinary income part of a lump-sum
distribution. You pay the tax only once, for the year in
which you receive the distribution, not over the next 10
years. You can elect this treatment only once for any plan
participant, and only if the plan participant was born be-
fore January 2, 1936.
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The ordinary income part of the distribution is the
amount shown in box 2a of the Form 1099-R given to you
by the payer, minus the amount, if any, shown in box 3.
You can also treat the capital gain part of the distribution
(box 3 of Form 1099-R) as ordinary income for the 10-year
tax option if you don't choose capital gain treatment for
that part.
Complete Part III of Form 4972 to choose the 10-year
tax option. You must use the special Tax Rate Schedule
shown in the instructions for Part III to figure the tax.
Examples
The following examples show how to figure the separate
tax on Form 4972.
Example 1. Robert C. Smith, who was born in 1935,
retired from Crabtree Corporation in 2016. He withdrew
the entire amount to his credit from the company's quali-
fied pension plan. In December 2016, he received a total
distribution of $175,000 (the $25,000 tax-free part of the
distribution consisting of employee contributions plus the
$150,000 taxable part of the distribution consisting of em-
ployer contributions and earnings on all contributions).
The payer gave Robert a Form 1099-R, which shows
the capital gain part of the taxable distribution (the part at-
tributable to participation before 1974) to be $10,000.
Robert elects 20% capital gain treatment for this part. Fil-
led-in copies of Robert's Form 1099-R and Form
4972 follow. He enters $10,000 on Form 4972, Part II,
line 6 and $2,000 ($10,000 × 20%) on Part II, line 7.
The ordinary income part of the taxable distribution is
$140,000 ($150,000 $10,000). Robert elects to figure
the tax on this part using the 10-year tax option. He enters
$140,000 on Form 4972, Part III, line 8. Then he com-
pletes the rest of Form 4972 and includes the tax of
$24,270 in the total on line 44 of his Form 1040.
Form 1099-R
2016
Distributions From
Pensions, Annuities,
Retirement or
Profit-Sharing
Plans, IRAs,
Insurance
Contracts, etc.
Copy B
Report this
income on your
federal tax
return. If this
form shows
federal income
tax withheld in
box 4, attach
this copy to
your return.
Department of the Treasury - Internal Revenue Service
This information is
being furnished to
the Internal
Revenue Service.
OMB No. 1545-0119
CORRECTED (if checked)
PAYER’S name, street address, city or town, state or province,
country, and ZIP or foreign postal code
PAYER’S federal identication
number
RECIPIENT’S identication
number
RECIPIENT’S name
Street address (including apt. no.)
City or town, state or province, country, and ZIP or foreign postal code
10 Amount allocable to IRR
within 5 years
$
11
1st year of
desig. Roth contrib.
FATCA ling
requirement
Account number (see instructions)
1 Gross distribution
$
2a Taxable amount
$
2b Taxable amount
not determined
Total
distribution
3 Capital gain (included
in box 2a)
$
4 Federal income tax
withheld
$
5 Employee contributions
/Designated Roth
contributions or
insurance premiums
$
6 Net unrealized
appreciation in
employer’s securities
$
7 Distribution
code(s)
IRA/
SEP/
SIMPLE
8 Other
$%
9a Your percentage of total
distribution %
9b
Total employee contributions
$
12 State tax withheld
$
$
13
State/Payer’s state no.
14 State distribution
$
$
15 Local tax withheld
$
$
16 Name of locality 17 Local distribution
$
$
Form 1099-R www.irs.gov/form1099r
Crabtree Corporation Employees’ Pension Plan
1111 Main Street
Anytown, Texas 75000
175000.00
150000.00
30000.0010000.00
002-00-345610-0000000
Robert C. Smith
911 Mill Way
Anytown, Texas 75000
25000.00
7A
X
Publication 575 (2016) Page 23
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Robert C. Smith
10,000
2,000
140,000
140,000
140,000
140,000
14,000
140,000
-0-
2,227
22,270
22,270
24,270
002-03-3456
Form 4972
Department of the Treasury
Internal Revenue Service (99)
Tax on Lump-Sum Distributions
(From Qualified Plans of Participants Born Before January 2, 1936)
Information about Form 4972 and its instructions is available at www.irs.gov/form4972.
Attach to Form 1040, Form 1040NR, or Form 1041.
OMB No. 1545-0193
2016
Attachment
Sequence No. 28
Name of recipient of distribution Identifying number
Part I Complete this part to see if you can use Form 4972
1
Was this a distribution of a plan participant’s entire balance (excluding deductible voluntary employee
contributions and certain forfeited amounts) from all of an employer’s qualied plans of one kind (for
example, pension, prot-sharing, or stock bonus)? If “No,” don't use this form . . . . . . . . . .
Yes No
1
2 Did you roll over any part of the distribution? If “Yes,” don't use this form . . . . . . . . . . . 2
3 Was this distribution paid to you as a beneciary of a plan participant who was born before January 2, 1936? 3
4
Were you (a) a plan participant who received this distribution, (b) born before January 2, 1936, and (c) a
participant in the plan for at least 5 years before the year of the distribution? . . . . . . . . . . 4
If you answered “No” to both questions 3 and 4, don't use this form.
5
a
Did you use Form 4972 after 1986 for a previous distribution from your own plan? If “Yes,” don't use this
form for a 2016 distribution from your own plan . . . . . . . . . . . . . . . . . . . . 5a
b
If you are receiving this distribution as a beneciary of a plan participant who died, did you use Form 4972
for a previous distribution received as a beneciary of that participant after 1986? If “Yes,” don't use this
form for this distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5b
Part II Complete this part to choose the 20% capital gain election (see instructions)
6 Capital gain part from Form 1099-R, box 3 . . . . . . . . . . . . . . . . . . . 6
7 Multiply line 6 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . 7
If you also choose to use Part III, go to line 8. Otherwise, include the amount from line 7 in the
total on Form 1040, line 44; Form 1040NR, line 42; or Form 1041, Schedule G, line 1b.
Part III Complete this part to choose the 10-year tax option (see instructions)
8
If you completed Part II, enter the amount from Form 1099-R, box 2a minus box 3. If you didn't
complete Part II, enter the amount from box 2a. Multiple recipients (and recipients who elect to
include net unrealized appreciation (NUA) in taxable income) see instructions . . . . . . . 8
9 Death benet exclusion for a beneciary of a plan participant who died before August 21, 1996 . 9
10 Total taxable amount. Subtract line 9 from line 8 . . . . . . . . . . . . . . . . . 10
11 Current actuarial value of annuity from Form 1099-R, box 8. If none, enter -0- . . . . . . . 11
12
Adjusted total taxable amount. Add lines 10 and 11. If this amount is $70,000 or more, skip lines
13 through 16, enter this amount on line 17, and go to line 18 . . . . . . . . . . . . 12
13 Multiply line 12 by 50% (0.50), but don't enter more than $10,000 . . 13
14
Subtract $20,000 from line 12. If line 12 is
$20,000 or less, enter -0- . . . . . . 14
15 Multiply line 14 by 20% (0.20) . . . . . . . . . . . . . . 15
16 Minimum distribution allowance. Subtract line 15 from line 13 . . . . . . . . . . . . 16
17 Subtract line 16 from line 12 . . . . . . . . . . . . . . . . . . . . . . . 17
18 Federal estate tax attributable to lump-sum distribution . . . . . . . . . . . . . . 18
19 Subtract line 18 from line 17. If line 11 is zero, skip lines 20 through 22 and go to line 23 . . . 19
20
Divide line 11 by line 12 and enter the result as a decimal (rounded to at
least three places) . . . . . . . . . . . . . . . . . . 20 .
21 Multiply line 16 by the decimal on line 20 . . . . . . . . . . 21
22 Subtract line 21 from line 11 . . . . . . . . . . . . . . 22
23 Multiply line 19 by 10% (0.10) . . . . . . . . . . . . . . . . . . . . . . . 23
24 Tax on amount on line 23. Use the Tax Rate Schedule in the instructions . . . . . . . . . 24
25
Multiply line 24 by 10.0. If line 11 is zero, skip lines 26 through 28, enter this amount on
line 29, and go to line 30 . . . . . . . . . . . . . . . . . . . . . . . . 25
26 Multiply line 22 by 10% (0.10) . . . . . . . . . . . . . . 26
27
Tax on amount on line 26. Use the Tax Rate Schedule in the
instructions .................... 27
28 Multiply line 27 by 10.0 . . . . . . . . . . . . . . . . . . . . . . . . . 28
29 Subtract line 28 from line 25. Multiple recipients see instructions . . . . . . . . . . 29
30
Tax on lump-sum distribution. Add lines 7 and 29. Also include this amount in the total on Form
1040, line 44; Form 1040NR, line 42; or Form 1041, Schedule G, line 1b . . . . . . . . 30
For Paperwork Reduction Act Notice, see instructions. Cat. No. 13187U Form 4972 (2016)
Page 24 Publication 575 (2016)
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Example 2. Mary Brown, who was born in 1935, sold
her business in 2016. She withdrew her entire interest in
the qualified profit-sharing plan she had set up as the sole
proprietor.
The cash part of the distribution, $160,000, is all ordi-
nary income and is shown on her Form 1099-R below.
She chooses to figure the tax on this amount using the
10-year tax option. Mary also received an annuity contract
as part of the distribution from the plan. Box 8, Form
1099-R, shows that the current actuarial value of the an-
nuity was $10,000. She enters these figures on Form
4972 (shown later).
After completing Form 4972, she includes the tax of
$28,070 in the total on Form 1040, line 44.
Form 1099-R
2016
Distributions From
Pensions, Annuities,
Retirement or
Profit-Sharing
Plans, IRAs,
Insurance
Contracts, etc.
Copy B
Report this
income on your
federal tax
return. If this
form shows
federal income
tax withheld in
box 4, attach
this copy to
your return.
Department of the Treasury - Internal Revenue Service
This information is
being furnished to
the Internal
Revenue Service.
OMB No. 1545-0119
CORRECTED (if checked)
PAYER’S name, street address, city or town, state or province,
country, and ZIP or foreign postal code
PAYER’S federal identication
number
RECIPIENT’S identication
number
RECIPIENT’S name
Street address (including apt. no.)
City or town, state or province, country, and ZIP or foreign postal code
10 Amount allocable to IRR
within 5 years
$
11
1st year of
desig. Roth contrib.
FATCA ling
requirement
Account number (see instructions)
1 Gross distribution
$
2a Taxable amount
$
2b Taxable amount
not determined
Total
distribution
3 Capital gain (included
in box 2a)
$
4 Federal income tax
withheld
$
5 Employee contributions
/Designated Roth
contributions or
insurance premiums
$
6 Net unrealized
appreciation in
employer’s securities
$
7 Distribution
code(s)
IRA/
SEP/
SIMPLE
8 Other
$%
9a Your percentage of total
distribution %
9b
Total employee contributions
$
12 State tax withheld
$
$
13
State/Payer’s state no.
14 State distribution
$
$
15 Local tax withheld
$
$
16 Name of locality 17 Local distribution
$
$
Form 1099-R www.irs.gov/form1099r
160000.00
160000.00
32000.00
005-00-678910-0000000
Mary Brown
12 Mill Avenue
Anytown, Nevada 89300
25000.00
10000.007A
X
Browns Real Estate
Profit-Sharing Plan
2101 Chelsea Court
Anytown, Nevada 89300
Publication 575 (2016) Page 25
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Mary Brown
160,000
160,000
170,000
170,000
17,000
170,000
10,000
2,917
28,070
29,170
28,070
005-00-6789
0588
10,000
1,100
1,000
110
Form 4972
Department of the Treasury
Internal Revenue Service (99)
Tax on Lump-Sum Distributions
(From Qualified Plans of Participants Born Before January 2, 1936)
Information about Form 4972 and its instructions is available at www.irs.gov/form4972.
Attach to Form 1040, Form 1040NR, or Form 1041.
OMB No. 1545-0193
2016
Attachment
Sequence No. 28
Name of recipient of distribution Identifying number
Part I Complete this part to see if you can use Form 4972
1
Was this a distribution of a plan participant’s entire balance (excluding deductible voluntary employee
contributions and certain forfeited amounts) from all of an employer’s qualied plans of one kind (for
example, pension, prot-sharing, or stock bonus)? If “No,” don't use this form . . . . . . . . . .
Yes No
1
2 Did you roll over any part of the distribution? If “Yes,” don't use this form . . . . . . . . . . . 2
3 Was this distribution paid to you as a beneciary of a plan participant who was born before January 2, 1936? 3
4
Were you (a) a plan participant who received this distribution, (b) born before January 2, 1936, and (c) a
participant in the plan for at least 5 years before the year of the distribution? . . . . . . . . . . 4
If you answered “No” to both questions 3 and 4, don't use this form.
5
a
Did you use Form 4972 after 1986 for a previous distribution from your own plan? If “Yes,” don't use this
form for a 2016 distribution from your own plan . . . . . . . . . . . . . . . . . . . . 5a
b
If you are receiving this distribution as a beneciary of a plan participant who died, did you use Form 4972
for a previous distribution received as a beneciary of that participant after 1986? If “Yes,” don't use this
form for this distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5b
Part II Complete this part to choose the 20% capital gain election (see instructions)
6 Capital gain part from Form 1099-R, box 3 . . . . . . . . . . . . . . . . . . . 6
7 Multiply line 6 by 20% (0.20) . . . . . . . . . . . . . . . . . . . . . . 7
If you also choose to use Part III, go to line 8. Otherwise, include the amount from line 7 in the
total on Form 1040, line 44; Form 1040NR, line 42; or Form 1041, Schedule G, line 1b.
Part III Complete this part to choose the 10-year tax option (see instructions)
8
If you completed Part II, enter the amount from Form 1099-R, box 2a minus box 3. If you didn't
complete Part II, enter the amount from box 2a. Multiple recipients (and recipients who elect to
include net unrealized appreciation (NUA) in taxable income) see instructions . . . . . . . 8
9 Death benet exclusion for a beneciary of a plan participant who died before August 21, 1996 . 9
10 Total taxable amount. Subtract line 9 from line 8 . . . . . . . . . . . . . . . . . 10
11 Current actuarial value of annuity from Form 1099-R, box 8. If none, enter -0- . . . . . . . 11
12
Adjusted total taxable amount. Add lines 10 and 11. If this amount is $70,000 or more, skip lines
13 through 16, enter this amount on line 17, and go to line 18 . . . . . . . . . . . . 12
13 Multiply line 12 by 50% (0.50), but don't enter more than $10,000 . . 13
14
Subtract $20,000 from line 12. If line 12 is
$20,000 or less, enter -0- . . . . . . 14
15 Multiply line 14 by 20% (0.20) . . . . . . . . . . . . . . 15
16 Minimum distribution allowance. Subtract line 15 from line 13 . . . . . . . . . . . . 16
17 Subtract line 16 from line 12 . . . . . . . . . . . . . . . . . . . . . . . 17
18 Federal estate tax attributable to lump-sum distribution . . . . . . . . . . . . . . 18
19 Subtract line 18 from line 17. If line 11 is zero, skip lines 20 through 22 and go to line 23 . . . 19
20
Divide line 11 by line 12 and enter the result as a decimal (rounded to at
least three places) . . . . . . . . . . . . . . . . . . 20 .
21 Multiply line 16 by the decimal on line 20 . . . . . . . . . . 21
22 Subtract line 21 from line 11 . . . . . . . . . . . . . . 22
23 Multiply line 19 by 10% (0.10) . . . . . . . . . . . . . . . . . . . . . . . 23
24 Tax on amount on line 23. Use the Tax Rate Schedule in the instructions . . . . . . . . . 24
25
Multiply line 24 by 10.0. If line 11 is zero, skip lines 26 through 28, enter this amount on
line 29, and go to line 30 . . . . . . . . . . . . . . . . . . . . . . . . 25
26 Multiply line 22 by 10% (0.10) . . . . . . . . . . . . . . 26
27
Tax on amount on line 26. Use the Tax Rate Schedule in the
instructions .................... 27
28 Multiply line 27 by 10.0 . . . . . . . . . . . . . . . . . . . . . . . . . 28
29 Subtract line 28 from line 25. Multiple recipients see instructions . . . . . . . . . . 29
30
Tax on lump-sum distribution. Add lines 7 and 29. Also include this amount in the total on Form
1040, line 44; Form 1040NR, line 42; or Form 1041, Schedule G, line 1b . . . . . . . . 30
For Paperwork Reduction Act Notice, see instructions. Cat. No. 13187U Form 4972 (2016)
Page 26 Publication 575 (2016)
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Rollovers
If you withdraw cash or other assets from a qualified re-
tirement plan in an eligible rollover distribution, you can
generally defer tax on the distribution by rolling it over to
another qualified retirement plan, a traditional IRA or, after
2 years of participation in a SIMPLE IRA sponsored by
your employer, a SIMPLE IRA under that plan. You don't
include the amount rolled over in your income until you re-
ceive it in a distribution from the recipient plan or IRA with-
out rolling over that distribution. (For information about
rollovers from traditional IRAs, see chapter 1 of Pub.
590-A.)
If you roll over the distribution to a traditional IRA, you
can't deduct the amount rolled over as an IRA contribu-
tion. When you later withdraw it from the IRA, you can't
use the optional methods discussed earlier under
LumpSum Distributions to figure the tax.
Self-employed individuals are generally treated as em-
ployees for the rules on the tax treatment of distributions,
including the rules for rollovers.
See Designated Roth accounts, later, for information
on rollovers (including in-plan Roth rollovers) related to
those accounts. Also, see Rollovers to Roth IRAs, later,
for information on rollovers from a qualified retirement
plan to a Roth IRA.
Qualified retirement plan. For this purpose, the follow-
ing plans are qualified retirement plans.
A qualified employee plan.
A qualified employee annuity.
A tax-sheltered annuity plan (403(b) plan).
An eligible state or local government section 457 de-
ferred compensation plan.
Eligible rollover distribution. An eligible rollover distri-
bution is any distribution of all or any part of the balance to
your credit in a qualified retirement plan except:
1. Any of a series of substantially equal distributions
paid at least once a year over:
a. Your lifetime or life expectancy,
b. The joint lives or life expectancies of you and your
beneficiary, or
c. A period of 10 years or more,
2. A required minimum distribution (discussed later un-
der Tax on Excess Accumulation),
3. Hardship distributions,
4. Corrective distributions of excess contributions or ex-
cess deferrals, and any income allocable to these dis-
tributions, or of excess annual additions and any allo-
cable gains (see Corrective distributions of excess
plan contributions, at the beginning of Taxation of
Nonperiodic Payments, earlier),
5. A loan treated as a distribution because it doesn't sat-
isfy certain requirements either when made or later
(such as upon default), unless the participant's ac-
crued benefits are reduced (offset) to repay the loan
(see Loans Treated as Distributions, earlier),
6. Dividends paid on employer securities, and
7. The cost of life insurance coverage.
In addition, a distribution to the plan participant's bene-
ficiary generally isn't treated as an eligible rollover distri-
bution. However, see Qualified domestic relations order
(QDRO), Rollover by surviving spouse, and Rollovers by
nonspouse beneficiary, later.
Rollover of nontaxable amounts. You may be able to
roll over the nontaxable part of a distribution (such as your
after-tax contributions) made to another qualified retire-
ment plan that is a qualified employee plan or a 403(b)
plan, or to a traditional or Roth IRA. The transfer must be
made either through a direct rollover to a qualified plan or
403(b) plan that separately accounts for the taxable and
nontaxable parts of the rollover or through a rollover to a
traditional or Roth IRA.
If you roll over only part of a distribution that includes
both taxable and nontaxable amounts, the amount you roll
over is treated as coming first from the taxable part of the
distribution.
Any after-tax contributions that you roll over into your
traditional IRA become part of your basis (cost) in your
IRAs. To recover your basis when you take distributions
from your IRA, you must complete Form 8606, Nondeduc-
tible IRAs, for the year of the distribution. For more infor-
mation, see the Form 8606 instructions.
Withholding requirements. If an eligible rollover distri-
bution is paid to you, the payer must withhold 20% of it.
This applies even if you plan to roll over the distribution to
another qualified retirement plan or to an IRA. However,
you can avoid withholding by choosing the direct rollover
option, discussed later. Also, see Choosing the right op
tion at the end of this discussion.
Exceptions. An eligible rollover distribution isn't sub-
ject to withholding to the extent it consists of net unreal-
ized appreciation from employer securities that can be ex-
cluded from your gross income. (For a discussion of the
tax treatment of a distribution of employer securities, see
Figuring the Taxable Amount under Taxation of Nonperi
odic Payments, earlier.)
In addition, withholding from an eligible rollover distri-
bution paid to you isn't required if:
The distribution and all previous eligible rollover distri-
butions you received during the tax year from the
same plan (or, at the payer's option, from all your em-
ployer's plans) total less than $200, or
The distribution consists solely of employer securities,
plus cash of $200 or less in lieu of fractional shares.
Publication 575 (2016) Page 27
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Direct rollover option. You can choose to have any part
or all of an eligible rollover distribution paid directly to an-
other qualified retirement plan that accepts rollover
distributions or to a traditional or Roth IRA.
There is an automatic rollover requirement for manda-
tory distributions. A mandatory distribution is a distribution
made without your consent and before you reach age 62
or normal retirement age, whichever is later. The auto-
matic rollover requirement applies if the distribution is
more than $1,000 and is an eligible rollover distribution.
You can choose to have the distribution paid directly to
you or rolled over directly to your traditional or Roth IRA or
another qualified retirement plan. If you don't make this
choice, the plan administrator will automatically roll over
the distribution into an IRA of a designated trustee or is-
suer.
No tax withheld. If you choose the direct rollover op-
tion, or have an automatic rollover, no tax will be withheld
from any part of the distribution that is directly paid to the
trustee of the other plan. If any part of the eligible rollover
distribution is paid to you, the payer must generally with-
hold 20% of it for income tax.
Payment to you option. If an eligible rollover distribution
is paid to you, 20% generally will be withheld for income
tax. However, the full amount is treated as distributed to
you even though you actually receive only 80%. You gen-
erally must include in income any part (including the part
withheld) that you don't roll over within 60 days to another
qualified retirement plan or to a traditional or Roth IRA.
If you are under age 5912 when a distribution is paid to
you, you may have to pay a 10% tax (in addition to the
regular income tax) on the taxable part (including any tax
withheld) that you don't roll over. See Tax on Early Distri
butions, later.
Partial rollovers. If you receive a lump-sum distribu-
tion, it may qualify for special tax treatment. See
LumpSum Distributions, earlier. However, if you roll over
any part of the distribution, the part you keep doesn't qual-
ify for special tax treatment.
Rolling over more than amount received. If
you decide to roll over an amount equal to the dis
tribution before withholding, your contribution to
the new plan or IRA must include other money (for exam
ple, from savings or amounts borrowed) to replace the
amount withheld.
Example. You receive an eligible rollover distribution
of $10,000 from your employer's qualified employee plan.
The payer withholds $2,000, so you actually receive
$8,000. If you want to roll over the entire $10,000 to post-
pone including that amount in your income, you will have
to get $2,000 from some other source to add to the $8,000
you actually received.
If you roll over only $8,000, you must include the
$2,000 not rolled over in your income for the distribution
year. Also, you may be subject to the 10% additional tax
on the $2,000 if it was distributed to you before you
reached age 5912.
CAUTION
!
Time for making rollover. You generally must complete
the rollover of an eligible rollover distribution paid to you
by the 60th day following the day on which you receive the
distribution from your employer's plan.
The IRS may waive the 60-day requirement where the
failure to do so would be against equity or good con-
science, such as in the event of a casualty, disaster, or
other event beyond your reasonable control.
Example. In the previous example, you received the
distribution on June 30. To postpone including it in your in-
come, you must complete the rollover by August 29, the
60th day following June 30.
Ways to get a waiver of the 60-day rollover require-
ment. There are three ways to obtain a waiver of the
60-day requirement:
You qualify for an automatic waiver,
You self-certify that you met the requirements of a
waiver, or
You request and receive a private letter ruling granting
a waiver.
For more information about requesting a waiver of the
60-day rollover requirement, rollovers permitted between
the various types of retirement plans (including IRAs), and
other topics regarding rollovers see Rollovers in Pub.
590-A, Contributions to Individual Retirement Arrange-
ments (IRAs).
Frozen deposits. If an amount distributed to you be-
comes a frozen deposit in a financial institution during the
60-day period after you receive it, the rollover period is ex-
tended. An amount is a frozen deposit if you can't with-
draw it because of either:
The bankruptcy or insolvency of the financial institu-
tion, or
A restriction on withdrawals by the state in which the
institution is located because of the bankruptcy or in-
solvency (or threat of it) of one or more financial insti-
tutions in the state.
The 60-day rollover period is extended by the period for
which the amount is a frozen deposit and doesn't end ear-
lier than 10 days after the amount is no longer a frozen de-
posit.
Retirement bonds. If you redeem retirement bonds pur-
chased under a qualified bond purchase plan, you can roll
over the proceeds that exceed your basis tax free into an
IRA or qualified employer plan. Subsequent distributions
of those proceeds, however, don't qualify for the 10-year
tax option or capital gain treatment.
Annuity contracts. If an annuity contract was distributed
to you by a qualified retirement plan, you can roll over an
amount paid under the contract that is otherwise an eligi-
ble rollover distribution. For example, you can roll over a
single sum payment you receive upon surrender of the
contract to the extent it is taxable and isn't a required mini-
mum distribution.
Page 28 Publication 575 (2016)
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Rollovers of property. To roll over an eligible rollover
distribution of property, you must either roll over the actual
property distributed or sell it and roll over the proceeds.
You can't keep the distributed property and roll over cash
or other property.
If you sell the distributed property and roll over all the
proceeds, no gain or loss is recognized on the sale. The
sale proceeds (including any portion representing an in-
crease in value) are treated as part of the distribution and
aren't included in your gross income.
If you roll over only part of the proceeds, you are taxed
on the part you keep. You must allocate the proceeds you
keep between the part representing ordinary income from
the distribution (its value upon distribution) and the part
representing gain or loss from the sale (its change in value
from its distribution to its sale).
Example 1. On September 4, 2016, Paul received an
eligible rollover distribution from his employer's noncontri-
butory qualified employee plan of $50,000 in nonemployer
stock. On September 24, 2016, he sold the stock for
$60,000. On October 2, 2016, he contributed $60,000
cash to a traditional IRA. Paul doesn't include either the
$50,000 eligible rollover distribution or the $10,000 gain
from the sale of the stock in his income. The entire
$60,000 rolled over will be ordinary income when he with-
draws it from his IRA.
Example 2. The facts are the same as in Example 1,
except that Paul sold the stock for $40,000 and contrib-
uted $40,000 to the IRA. Paul doesn't include the $50,000
eligible rollover distribution in his income and doesn't de-
duct the $10,000 loss from the sale of the stock. The
$40,000 rolled over will be ordinary income when he with-
draws it from his IRA.
Example 3. The facts are the same as in Example 1,
except that Paul rolled over only $45,000 of the $60,000
proceeds from the sale of the stock. The $15,000 pro-
ceeds he didn't roll over includes part of the gain from the
stock sale. Paul reports $2,500 ($10,000 ÷ $60,000 ×
$15,000) as capital gain and $12,500 ($50,000 ÷ $60,000
× $15,000) as ordinary income.
Example 4. The facts are the same as in Example 2,
except that Paul rolled over only $25,000 of the $40,000
proceeds from the sale of the stock. The $15,000 pro-
ceeds he didn’t roll over includes part of the loss from the
stock sale. Paul reports $3,750 ($10,000 ÷ $40,000 ×
$15,000) capital loss and $18,750 ($50,000 ÷ $40,000 ×
$15,000) ordinary income.
Property and cash distributed. If both cash and prop-
erty were distributed and you didn't roll over the entire dis-
tribution, you may designate what part of the rollover is al-
locable to the cash distribution and what part is allocable
to the proceeds from the sale of the distributed property. If
the distribution included an amount that isn’t taxable
(other than the net unrealized appreciation in employer
securities) as well as an eligible rollover distribution, you
may also designate what part of the nontaxable amount is
allocable to the cash distribution and what part is allocable
to the property. Your designation must be made by the
due date for filing your tax return, including extensions.
You can't change your designation after that date. If you
don't make a designation on time, the rollover amount or
the nontaxable amount must be allocated on a ratable ba-
sis.
Qualified domestic relations order (QDRO). You may
be able to roll over tax free all or part of a distribution from
a qualified retirement plan that you receive under a
QDRO. (See Qualified domestic relations order (QDRO)
under General Information, earlier.) If you receive the dis-
tribution as an employee's spouse or former spouse (not
as a nonspousal beneficiary), the rollover rules apply to
you as if you were the employee.
Rollover by surviving spouse. You may be able to roll
over tax free all or part of a distribution from a qualified re-
tirement plan you receive as the surviving spouse of a de-
ceased employee. The rollover rules apply to you as if you
were the employee. You can roll over the distribution into
a qualified retirement plan or a traditional or Roth IRA. For
a rollover to a Roth IRA, see Rollovers to Roth IRAs, later.
A distribution paid to a beneficiary other than the em-
ployee's surviving spouse is generally not an eligible roll-
over distribution. However, see Rollovers by nonspouse
beneficiary next.
Rollovers by nonspouse beneficiary. If you are a des-
ignated beneficiary (other than a surviving spouse) of a
deceased employee, you may be able to roll over tax free
all or a portion of a distribution you receive from an eligible
retirement plan of the employee. The distribution must be
a direct trustee-to-trustee transfer to your traditional or
Roth IRA that was set up to receive the distribution. The
transfer will be treated as an eligible rollover distribution
and the receiving plan will be treated as an inherited IRA.
For information on inherited IRAs, see What if You Inherit
an IRA? in chapter 1 of Pub. 590-B.
How to report. Enter the total distribution (before income
tax or other deductions were withheld) on Form 1040,
line 16a; Form 1040A, line 12a; or Form 1040NR,
line 17a. This amount should be shown in box 1 of Form
1099-R. From this amount, subtract any contributions
(usually shown in box 5 of Form 1099-R) that were taxable
to you when made. From that result, subtract the amount
that was rolled over either directly or within 60 days of re-
ceiving the distribution. Enter the remaining amount, even
if zero, on Form 1040, line 16b; Form 1040A, line 12b; or
Form 1040NR, line 17b. Also, write "Rollover" next to the
line.
Written explanation to recipients. The administrator of
a qualified retirement plan must, within a reasonable pe-
riod of time before making an eligible rollover distribution,
provide you with a written explanation. It must tell you
about all of the following.
Your right to have the distribution paid tax free directly
to another qualified retirement plan or to a traditional
or Roth IRA.
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The requirement to withhold tax from the distribution if
it isn't directly rolled over.
The nontaxability of any part of the distribution that
you roll over within 60 days after you receive the distri-
bution.
Other qualified retirement plan rules that apply, includ-
ing those for lump-sum distributions, alternate payees,
and cash or deferred arrangements.
How the distribution rules of the plan to which you roll
over the distribution may differ from the rules that ap-
ply to the plan making the distribution in their restric-
tions and tax consequences.
Reasonable period of time. The plan administrator
must provide you with a written explanation no earlier than
90 days and no later than 30 days before the distribution
is made. However, you can choose to have a distribution
made less than 30 days after the explanation is provided
as long as the following two requirements are met.
You must have the opportunity to consider whether or
not you want to make a direct rollover for at least 30
days after the explanation is provided.
The information you receive must clearly state that
you have the right to have 30 days to make a decision.
Contact the plan administrator if you have any questions
regarding this information.
Designated Roth accounts. You can roll over an eligi-
ble rollover distribution from a designated Roth account
into another designated Roth account or a Roth IRA. If
you want to roll over the part of the distribution that isn't in-
cluded in income, you must make a direct rollover of the
entire distribution (see Direct rollover option, earlier) or
you can roll over the entire amount (or any portion) to a
Roth IRA. Also, if you are a plan participant in a 401(k),
403(b), or 457(b) plan, your plan may permit you to roll
over amounts in those plans to a designated Roth account
within the same plan (in-plan Roth rollover). The rollover
of any untaxed amounts are included in income. See
Inplan Roth rollovers below.
A qualified distribution from a designated Roth account
isn't includible in income. (A qualified distribution is de-
fined earlier in the discussion of designated Roth ac-
counts under Taxation of Periodic Payments). Generally,
you can't have a qualified distribution within the 5-tax-year
period beginning with the first tax year for which the partic-
ipant made a designated Roth contribution to the plan. If a
direct rollover is made from a designated Roth account
under another plan or an in-plan Roth rollover is made, the
5-tax-year period of participation begins on the first day of
your tax year for which you first had designated Roth con-
tributions made to the account either making the distribu-
tion or receiving the distribution, whichever was earlier.
If you roll over only part of an eligible rollover distribu-
tion that isn't a qualified distribution and not paid as a di-
rect rollover contribution, the part rolled over is considered
to be first from the income portion of the distribution.
Example. You receive an eligible rollover distribution
that isn't a qualified distribution from your designated Roth
account. The distribution consists of $11,000 (investment)
and $3,000 (income earned). Within 60 days of receipt,
you roll over $7,000 into a Roth IRA. The $7,000 consists
of $3,000 of income and $4,000 of investment. Since you
rolled over the part of the distribution that could be inclu-
ded in gross income (income earned), none of the distri-
bution is included in gross income.
In-plan Roth rollovers. If you are a participant in a
401(k), 403(b), or 457(b) plan, your plan may permit you
to roll over any vested amounts from those plans to a des-
ignated Roth account within the same plan. The in-plan
Roth rollover must be an eligible rollover distribution (de-
fined earlier under Eligible rollover distribution). Any un-
taxed amounts included in the in-plan Roth rollover must
be included in income in the year you receive the distribu-
tion.
You can make the in-plan Roth rollover by direct trans-
fer of the amount from the non-Roth account to your des-
ignated Roth account within the same plan. The 20%
mandatory withholding doesn't apply to in-plan Roth roll-
overs made by direct rollover. You can also effect the
in-plan Roth rollover by receiving an eligible rollover distri-
bution from your 401(k), 403(b), or 457(b) plan and within
60 days deposit it into a designated Roth account in the
same plan.
Your plan must provide a written explanation of the
consequences of making an in-plan Roth rollover. In-plan
Roth rollovers can't be undone. Unlike rollovers to Roth
IRAs, you can't later recharacterize an in-plan Roth roll-
over.
If you received employer securities as a part of
your inplan Roth rollover distribution, the rollover
is treated as a distribution for the purpose of net
unrealized appreciation (NUA). See Distributions of em
ployer securities, earlier.
Mandatory 20% withholding. A payor must normally
withhold 20% when a rollover distribution is paid to you.
However, some part of your distribution may not be sub-
ject to the mandatory 20% withholding. Otherwise nondis-
tributable amounts aren't subject to the mandatory 20%
withholding. An example of otherwise nondistributable
amounts are employer matching contributions in a 401(k)
plan. See Payment to you option, earlier.
You can't roll over amounts from your Traditional
TSP to your Roth TSP. See Pub. 721 for more de
tails.
How to report. Enter the total amount of the distribu-
tion before income tax or deductions were withheld on
Form 1040, line 16a; Form 1040A, line 12a; or Form
1040NR, line 17a. This amount should be shown in box 1
of Form 1099-R. From this amount, subtract any contribu-
tions (usually shown in box 5 of Form 1099-R) that were
taxable to you when made. Enter the remaining amount,
even if zero, on Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR, line 17b.
TIP
CAUTION
!
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If you must include any amount in your gross in
come, you may have to increase your withholding
or make estimated tax payments. See Pub. 505,
Tax Withholding and Estimated Tax.
Rollovers to Roth IRAs. You can roll over distributions
directly from a qualified retirement plan (other than a des-
ignated Roth account) to a Roth IRA. You must include in
your gross income distributions from a qualified retirement
plan (other than a designated Roth account) that you
would have had to include in income if you hadn't rolled
them over into a Roth IRA. You don't include in gross in-
come any part of a distribution from a qualified retirement
plan that is a return of contributions to the plan that were
taxable to you when paid. In addition, the 10% tax on early
distributions doesn't apply.
Any amount rolled over into a Roth IRA is subject to the
same rules for converting a traditional IRA into a Roth IRA.
For more information, see Converting From Any Tradi
tional IRA Into a Roth IRA in chapter 1 of Pub. 590-A.
How to report. Enter the total amount of the distribu-
tion before income tax or deductions were withheld on
Form 1040, line 16a; Form 1040A, line 12a; or Form
1040NR, line 17a. This amount should be shown in box 1
of Form 1099-R. From this amount, subtract any contribu-
tions (usually shown in box 5 of Form 1099-R) that were
taxable to you when made. Enter the remaining amount,
even if zero, on Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR, line 17b.
If you must include any amount in your gross in
come, you may have to increase your withholding
or make estimated tax payments. See Pub. 505,
Tax Withholding and Estimated Tax.
Choosing the right option. Table 1 may help you de-
cide which distribution option to choose. Carefully com-
pare the effects of each option.
Table 1. Comparison of Payment to You
Versus Direct Rollover
Affected item
Result of a payment to
you
Result of a direct
rollover
Withholding The payer must withhold
20% of the taxable part. There is no withholding.
Additional tax
If you are under age 59
12, a 10% additional tax
may apply to the taxable
part (including an
amount equal to the tax
withheld) that isn't rolled
over.
There is no 10%
additional tax. See Tax
on Early Distributions,
later.
When to report
as income
Any taxable part
(including the taxable
part of any amount
withheld) not rolled over
is income to you in the
year paid.
Any taxable part isn't
income to you until later
distributed to you from
the new plan or IRA.
However, see Rollovers
to Roth IRAs, earlier, for
an exception.
CAUTION
!
CAUTION
!
Qualified settlement income. If you are a qualified tax-
payer and you received qualified settlement income in
connection with the Exxon Valdez litigation, you can con-
tribute all or part of it to an eligible retirement plan. This in-
cludes a qualified retirement plan. The amount contrib-
uted can’t exceed $100,000 (reduced by the amount of
qualified settlement income contributed to an eligible re-
tirement plan in prior tax years) or the amount of qualified
settlement income received during the tax year. Contribu-
tions for the year can be made until the due date for filing
your tax return, not including extensions.
Qualified settlement income that you contribute to a
qualified retirement plan will be treated as having been
rolled over in a direct trustee-to-trustee transfer within 60
days of the distribution. The amount contributed isn’t in-
cluded in your taxable income and it isn’t considered to be
investment in the contract.
You are a qualified taxpayer if you are:
A plaintiff in the civil action In re Exxon Valdez, No.
89-095-CV (HRH) (Consolidated) (D. Alaska), or
The beneficiary of the estate of a plaintiff who ac-
quired the right to receive qualified settlement income
from that plaintiff and who is the spouse or immediate
relative of that plaintiff.
Qualified settlement income is any interest or punitive
damage awards which are:
Otherwise includible in income, and
Received in connection with the Exxon Valdez civil ac-
tion described (whether pre- or post-judgment and
whether related to a settlement or a judgment).
Qualified settlement income can be received as periodic
payments or as a lump sum. See Pub. 525, Taxable and
Nontaxable Income, for information on how to report Ex-
xon Valdez settlement income.
Special rule for Roth IRAs and designated Roth
accounts. Qualified settlement income that is contrib-
uted to a Roth IRA or a designated Roth account will be:
Included in your taxable income for the year the quali-
fied settlement income was received, and
Treated as part of your cost basis (investment in the
contract) that isn’t taxable when distributed.
Special Additional Taxes
To discourage the use of pension funds for purposes
other than normal retirement, the law imposes additional
taxes on early distributions of those funds and on failures
to withdraw the funds timely. Ordinarily, you won't be sub-
ject to these taxes if you roll over all early distributions you
receive, as explained earlier, and begin drawing out the
funds at a normal retirement age, in prorated amounts
over your life expectancy. These special additional taxes
are the taxes on:
Early distributions, and
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Excess accumulation (not receiving minimum distribu-
tions).
These taxes are discussed in the following sections.
If you must pay either of these taxes, report them on
Form 5329. However, you don't have to file Form 5329 if
you owe only the tax on early distributions and your Form
1099-R correctly shows a “1” in box 7. Instead, enter 10%
of the taxable part of the distribution on Form 1040, line 59
and enter “No” under the heading “Other Taxes” to the left
of line 59. If you file Form 1040NR, enter 10% of the taxa-
ble part of the distribution on line 57 and enter “No” under
the heading “Other Taxes” to the left of line 57.
Even if you don't owe any of these taxes, you may have
to complete Form 5329 and attach it to your Form 1040 or
Form 1040NR. This applies if you meet an exception to
the tax on early distributions but box 7 of your Form
1099-R doesn't indicate an exception.
Tax on Early Distributions
Most distributions (both periodic and nonperiodic) from
qualified retirement plans and nonqualified annuity con-
tracts made to you before you reach age 5912 are subject
to an additional tax of 10%. This tax applies to the part of
the distribution that you must include in gross income. It
doesn't apply to any part of a distribution that is tax free,
such as amounts that represent a return of your cost or
that were rolled over to another retirement plan. It also
doesn’t apply to corrective distributions of excess defer-
rals, excess contributions, or excess aggregate contribu-
tions (discussed earlier under Taxation of Nonperiodic
Payments).
For this purpose, a qualified retirement plan is:
A qualified employee plan (including a qualified cash
or deferred arrangement (CODA) under Internal Reve-
nue Code section 401(k)),
A qualified employee annuity plan,
A tax-sheltered annuity plan (403(b) plan), or
An eligible state or local government section 457 de-
ferred compensation plan (to the extent that any distri-
bution is attributable to amounts the plan received in a
direct transfer or rollover from one of the other plans
listed here or an IRA).
5% rate on certain early distributions from deferred
annuity contracts. If an early withdrawal from a deferred
annuity is otherwise subject to the 10% additional tax, a
5% rate may apply instead. A 5% rate applies to distribu-
tions under a written election providing a specific sched-
ule for the distribution of your interest in the contract if, as
of March 1, 1986, you had begun receiving payments un-
der the election. On line 4 of Form 5329, multiply the line 3
amount by 5% instead of 10%. Attach an explanation to
your return.
Distributions from designated Roth accounts alloca-
ble to in-plan Roth rollovers within the 5-year period.
If, within the 5-year period starting with the first day of your
tax year in which you rolled over an amount from your
401(k), 403(b), or 457(b) plan to a designated Roth ac-
count, you take a distribution from the designated Roth
account, you may have to pay the additional 10% tax on
early distributions. You generally must pay the 10% addi-
tional tax on any amount attributable to the part of the
in-plan Roth rollover that you had to include in income (re-
capture amount). A separate 5-year period applies to
each in-plan Roth rollover. See Figuring your recapture
amount, later, to determine the recapture amount, if any.
The 5-year period used for determining whether the
10% early distribution tax applies to a distribution alloca-
ble to an in-plan Roth rollover is separately determined for
each in-plan Roth rollover, and isn't necessarily the same
as the 5-year period used for determining whether a distri-
bution is a qualified distribution.
Figuring your recapture amount. For any early dis-
tribution in 2016 from your designated Roth account that
is allocable to an in-plan Roth rollover, you allocate the
amount from your 2016 Form 1099-R, box 10, to the
amounts, if any, you have rolled over into that designated
Roth account.
If you haven’t taken a distribution from your designated
Roth account before 2016, then allocate the amount in
box 10 of your 2016 Form 1099-R to the amounts you re-
ported on the lines listed in the Recapture Allocation Chart
(filling in the Taxable column first, and then the Nontaxa-
ble column for each year) until you have covered the en-
tire amount in box 10.
If you have taken a distribution from your designated
Roth account prior to 2016, then allocate the amount in
box 10 of your 2016 Form 1099-R to the amounts you re-
ported on the lines listed in the Recapture Allocation Chart
(filling in the Taxable column first, and then the Nontaxa-
ble column for each year). However, don't start at the be-
ginning, instead begin with the first line that hasn’t been
used fully for a previous distribution.
Your recapture amount is the sum of the amounts you
allocated for 2012 through 2016 under the Taxable col-
umn in the Recapture Allocation Chart. You will also in-
clude this amount on Form 5329, line 1.
Example. You had an in-plan Roth rollover in 2016 of
$50,000. This is your first in-plan Roth rollover. Your 2016
Form 1040 includes $30,000 on line 16b, the taxable por-
tion of the in-plan Roth rollover, and $50,000 on line 16a,
the in-plan Roth rollover including $20,000 of basis.
In December of 2016, at age 57, you took a distribution
of $35,000 from your designated Roth account. The 2016
Form 1099-R shows the distribution of $35,000 reported
in box 1, the taxable portion of the distribution of $3,500
reported in box 2a, and the amount of $31,500 allocable
to the in-plan Roth rollover reported in box 10. Since you
had no in-plan Roth rollovers in prior years, you would al-
locate the $31,500 reported in box 10 of Form 1099-R as
shown in the Example Recapture Allocation Chart.
The recapture amount, the amount subject to tax on
early distributions allocable to the in-plan Roth rollover, is
$30,000 ($31,500 $1,500). Your amount subject to tax
on early distributions reported on Form 5329, line 1, for
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this distribution is $33,500 ($30,000 allocable to Form
1040, line 16b, and $3,500 from Form 1099-R, box 2a).
Exceptions to tax. Certain early distributions are excep-
ted from the early distribution tax. If the payer knows that
an exception applies to your early distribution, distribution
code “2,” “3,” or “4” should be shown in box 7 of your Form
1099-R and you don't have to report the distribution on
Form 5329. If an exception applies but distribution code
“1” (early distribution, no known exception) is shown in
box 7, you must file Form 5329. Enter the taxable amount
of the distribution shown in box 2a of your Form 1099-R
on line 1 of Form 5329. On line 2, enter the amount that
can be excluded and the exception number shown in the
Form 5329 instructions.
If distribution code “1” is incorrectly shown on
your Form 1099R for a distribution received
when you were age 5912 or older, include that dis
tribution on Form 5329. Enter exception number “12” on
line 2.
General exceptions. The tax doesn’t apply to distri-
butions that are:
Made as part of a series of substantially equal periodic
payments (made at least annually) for your life (or life
expectancy) or the joint lives (or joint life expectan-
cies) of you and your designated beneficiary (if from a
TIP
qualified retirement plan, the payments must begin af-
ter separation from service). See Substantially equal
periodic payments, later,
Made because you are totally and permanently disa-
bled (see Note below), or
Made on or after the death of the plan participant or
contract holder.
Note. You are considered disabled if you can furnish
proof that you can't do any substantial gainful activity be-
cause of your physical or mental condition. A physician
must determine that your condition can be expected to re-
sult in death or be of a long, continued, or indefinite dura-
tion.
Additional exceptions for qualified retirement
plans. The tax doesn’t apply to distributions that are:
From a qualified retirement plan (other than an IRA)
after your separation from service in or after the year
you reached age 55 (age 50 for qualified public safety
employees) (see Separation from service, later),
From a qualified retirement plan (other than an IRA) to
an alternate payee under a qualified domestic rela-
tions order,
From a qualified retirement plan to the extent you
have deductible medical expenses that exceed 10%
(7.5% if you or your spouse were born before January
Recapture Allocation Chart Keep for Your Records
Taxable
Year Taxable Nontaxable (Basis)
2010 Form 8606, line 23 ........ Form 8606, line 22 ...........
2011 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2012 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2013 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2014 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2015 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2016 Form 1040, line 16b; Form
1040A, line 12b; or Form
1040NR, line 17b* .........
orm 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
Total ..................... Total ........................
Note: The sum of the totals for each column should equal the amount reported on your 2016 Form 1099-R, box 10.
*Only include those amounts attributable to an in-plan Roth rollover.
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and attributable to an in-plan
Roth rollover.
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2, 1952) of your adjusted gross income, whether or
not you itemize your deductions for the year,
From an employer plan under a written election that
provides a specific schedule for distribution of your
entire interest if, as of March 1, 1986, you had separa-
ted from service and had begun receiving payments
under the election,
From an employee stock ownership plan for dividends
on employer securities held by the plan,
From a qualified retirement plan due to an IRS levy of
the plan, or
From elective deferral accounts under 401(k) or
403(b) plans, or similar arrangements, that are quali-
fied reservist distributions.
Phased retirement annuity payments made to federal
employees. See Pub. 721 for more information on the
phased retirement program.
Separation from service. In order to meet the re-
quirements for the first exception in the list above, you
must have separated from service in or after the year in
which you reach age 55 (or age 50 for qualified public
safety employees). You can’t separate from service be-
fore that year, wait until you are age 55 (or age 50 for
qualified public safety employees), and take a distribution.
Example. George separated from service from his em-
ployer at age 49. In the year he reached age 55 he took a
distribution from his retirement plan. Because he separa-
ted from service before he reached age 55, he didn’t meet
the requirements for the exception for a distribution made
from a qualified retirement plan (other than an IRA) after
separating from service in or after reaching age 55 (age
50 for qualified public safety employees).
Qualified public safety employees. If you are a
qualified public safety employee, distributions made from
a governmental defined benefit pension plan aren’t sub-
ject to the additional tax on early distributions. You are a
qualified public safety employee if you provided police
protection, firefighting services, or emergency medical
services for a state or municipality, and you separated
from service in or after the year you attained age 50.
Qualified reservist distributions. A qualified reserv-
ist distribution isn’t subject to the additional tax on early
distributions. A qualified reservist distribution is a distribu-
tion (a) from elective deferrals under a section 401(k) or
403(b) plan, or a similar arrangement, (b) to an individual
ordered or called to active duty (because he or she is a
member of a reserve component) for a period of more
than 179 days or for an indefinite period, and (c) made
during the period beginning on the date of the order or call
and ending at the close of the active duty period. You
Example Recapture Allocation Chart Keep for Your Records
Taxable
Year Taxable Nontaxable (Basis)
2010 Form 8606, line 23 ............. Form 8606, line 22 ...........
2011 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ......................
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2012 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ......................
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2013 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ......................
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2014 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ......................
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2015 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ......................
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ...........
2016 Form 1040, line 16b; Form 1040A,
line 12b; or Form 1040NR,
line 17b* ...................... $30,000
Form 1040, line 16a; Form
1040A, line 12a; or Form
1040NR, line 17a** ........... $1,500
Total .......................... $30,000 Total ........................ $1,500
Note: The sum of the totals for each column should equal the amount reported on your 2016 Form 1099-R, box 10.
*Only include those amounts attributable to an in-plan Roth rollover.
**Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and attributable to an in-plan
Roth rollover.
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must be ordered or called to active duty after September
11, 2001.
You can choose to recontribute part or all of the
distributions to an IRA. These additional contribu
tions must be made within 2 years after your ac
tiveduty period ends. Any amount recontributed must be
reported on Form 8606 as a nondeductible contribution.
You can’t take a deduction for these contributions. How
ever, the normal dollar limitations for contributions to IRAs
do not apply to these special contributions, and you can
make regular contributions to your IRA, up to the amount
otherwise allowable.
Additional exceptions for nonqualified annuity
contracts. The tax doesn’t apply to distributions that are:
From a deferred annuity contract to the extent alloca-
ble to investment in the contract before August 14,
1982,
From a deferred annuity contract under a qualified
personal injury settlement,
From a deferred annuity contract purchased by your
employer upon termination of a qualified employee
plan or qualified employee annuity plan and held by
your employer until your separation from service, or
From an immediate annuity contract (a single pre-
mium contract providing substantially equal annuity
payments that start within 1 year from the date of pur-
chase and are paid at least annually).
Substantially equal periodic payments. Payments
are substantially equal periodic payments if they are made
in accordance with one of the following methods.
1. Required minimum distribution method. Under
this method, the resulting annual payment is redeter-
mined for each year.
2. Fixed amortization method. Under this method, the
resulting annual payment is determined once for the
first distribution year and remains the same amount
for each succeeding year.
3. Fixed annuitization method. Under this method, the
resulting annual payment is determined once for the
first distribution year and remains the same amount
for each succeeding year.
For information on these methods, see Revenue Ruling
2002-62, which is on page 710 of Internal Revenue Bulle-
tin 2002-42 at www.irs.gov/pub/irsirbs/irb0242.pdf.
A change from method (2) or (3) to method (1)
isn’t treated as a modification to which the recap
ture tax (discussed next) applies.
Recapture tax for changes in distribution method
under equal payment exception. An early distribution
recapture tax may apply if, before you reach age 5912, the
distribution method under the equal periodic payment ex-
ception changes (for reasons other than your death or dis-
ability). The tax applies if the method changes from the
method requiring equal payments to a method that
TIP
TIP
wouldn’t have qualified for the exception to the tax. The
recapture tax applies to the first tax year to which the
change applies. The amount of tax is the amount that
would have been imposed had the exception not applied,
plus interest for the deferral period.
The recapture tax also applies after you reach age 5912
if your payments under a distribution method that qualifies
for the exception are modified within 5 years of the date of
the first payment. In that case, the tax applies only to pay-
ments distributed before you reach age 5912.
Report the recapture tax and interest on line 4 of Form
5329. Attach an explanation to the form. Don’t write the
explanation next to the line or enter any amount for the re-
capture on lines 1 or 3 of the form.
Tax on Excess Accumulation
To make sure that most of your retirement benefits are
paid to you during your lifetime, rather than to your benefi-
ciaries after your death, the payments that you receive
from qualified retirement plans must begin no later than
your required beginning date (defined later). The pay-
ments each year can’t be less than the minimum required
distribution.
If the actual distributions to you in any year are less
than the minimum required distribution (RMD) for that
year, you are subject to an additional tax. The tax equals
50% of the part of the required minimum distribution that
wasn’t distributed.
For this purpose, a qualified retirement plan includes:
A qualified employee plan,
A qualified employee annuity plan,
An eligible section 457 deferred compensation plan,
or
A tax-sheltered annuity plan (403(b) plan) (for benefits
accruing after 1986).
Waiver. The tax may be waived if you establish that the
shortfall in distributions was due to reasonable error and
that reasonable steps are being taken to remedy the
shortfall. If you believe you qualify for this relief, you must
file Form 5329 and attach a letter of explanation. In Part
VIII of that form, enter “RC” and the amount you want
waived in parentheses on the dotted line next to line 52.
Subtract this amount from the total shortfall you figured
without regard to the waiver and enter the result on
line 52.
State insurer delinquency proceedings. You might
not receive the minimum distribution because assets are
invested in a contract issued by an insurance company in
state insurer delinquency proceedings. If your payments
are reduced below the minimum because of these pro-
ceedings, you should contact your plan administrator. Un-
der certain conditions, you won’t have to pay the 50% ex-
cise tax.
Publication 575 (2016) Page 35
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Required beginning date. Unless the rule for 5% own-
ers applies, you generally must begin to receive distribu-
tions from your qualified retirement plan by April 1 of the
year that follows the later of:
The calendar year in which you reach age 7012, or
The calendar year in which you retire from employ-
ment with the employer maintaining the plan.
However, your plan may require you to begin to receive
distributions by April 1 of the year that follows the year in
which you reach age 7012, even if you haven’t retired.
If you reach age 7012 in 2016, you may be required to
receive your first distribution by April 1, 2017. Your re-
quired distribution then must be made for 2017 by Decem-
ber 31, 2017.
5% owners. If you are a 5% owner, you must begin to
receive distributions from the plan by April 1 of the year
that follows the calendar year in which you reach age 7012.
This rule doesn’t apply if your retirement plan is a govern-
ment or church plan.
You are a 5% owner if, for the plan year ending in the
calendar year in which you reach age 7012, you own (or
are considered to own under section 318 of the Internal
Revenue Code) more than 5% of the outstanding stock
(or more than 5% of the total voting power of all stock) of
the employer, or more than 5% of the capital or profits in-
terest in the employer.
Age 7012. You reach age 7012 on the date that is 6 cal-
endar months after the date of your 70th birthday. For ex-
ample, if your 70th birthday was on June 30, 2016, you
reached age 7012 on December 30, 2016. If your 70th
birthday was on July 1, 2016, you reached age 7012 on
January 1, 2017.
Required distributions. By the required beginning date,
you must either:
Receive your entire interest in the plan (for a tax-shel-
tered annuity, your entire benefit accruing after 1986),
or
Begin receiving periodic distributions in annual
amounts calculated to distribute your entire interest
(for a tax-sheltered annuity, your entire benefit accru-
ing after 1986) over your life or life expectancy or over
the joint lives or joint life expectancies of you and a
designated beneficiary (or over a shorter period).
After the starting year for periodic distributions, you
must receive at least the minimum required distribution for
each year by December 31 of that year. (The starting year
is the year in which you reach age 7012 or retire, whichever
applies in determining your required beginning date.) If no
distribution is made in your starting year, the minimum re-
quired distributions for 2 years must be made the follow-
ing year (one by April 1 and one by December 31).
Example. You retired under a qualified employee plan
in 2015. You reached age 7012 on August 20, 2016. For
2016 (your starting year), you must receive a minimum
amount from your retirement plan by April 1, 2017. You
must receive the minimum required distribution for 2017
by December 31, 2017.
Distributions after the employee's death. If the em-
ployee was receiving periodic distributions before his or
her death, any payments not made as of the time of death
must be distributed at least as rapidly as under the distri-
bution method being used at the date of death.
If the employee dies before the required beginning
date, the entire account must be distributed under one of
the following rules.
Rule 1. The distribution must be completed by De-
cember 31 of the fifth year following the year of the
employee's death.
Rule 2. The distribution must be made in annual
amounts over the life or life expectancy of the desig-
nated beneficiary.
The terms of the plan may determine which of these
two rules apply. If the plan permits the employee or the
beneficiary to choose the rule that applies, this choice
must be made by the earliest date a distribution would be
required under either of the rules. Generally, this date is
December 31 of the year following the year of the employ-
ee's death.
If the employee or the beneficiary didn’t choose either
rule and the plan doesn’t specify the rule that applies, dis-
tribution must be made under Rule 2 if the employee has
a designated beneficiary or under Rule 1 if the employee
doesn’t have a designated beneficiary.
Distributions under Rule 2 generally must begin by De-
cember 31 of the year following the year of the employee's
death. However, if the surviving spouse is the beneficiary,
distributions need not begin until December 31 of the year
the employee would have reached age 7012, if later.
If the surviving spouse is the designated beneficiary
and distributions are to be made under Rule 2, a special
rule applies if the spouse dies after the employee but be-
fore distributions are required to begin. In this case, distri-
butions may be made to the spouse's beneficiary under
either Rule 1 or Rule 2, as though the beneficiary were the
employee's beneficiary and the employee died on the
spouse's date of death. However, if the surviving spouse
remarries after the employee's death and the new spouse
is designated as the spouse's beneficiary, this special rule
applicable to surviving spouses doesn’t apply to the new
spouse.
Minimum distributions from an annuity plan. Special
rules may apply if you receive distributions from your re-
tirement plan in the form of an annuity. Your plan adminis-
trator should be able to give you information about these
rules.
Minimum distributions from an individual account
plan. Your plan administrator should be able to give you
information about how the amount of your required distri-
bution was figured.
If there is an account balance to be distributed from
your plan (not as an annuity), your plan administrator must
figure the minimum amount that must be distributed from
the plan each year.
Page 36 Publication 575 (2016)