Payments that you receive from the Plan based upon your pre-tax contributions and accumulated earnings generally are subject to federal income tax at the time of payment. However, there is an exception for an “eligible rollover distribution” that is directly rolled over into another eligible retirement plan or an IRA (including a Roth IRA). A rollover can be accomplished in either of two ways: (1) you can take a distribution and deposit it in an IRA or another eligible retirement plan within 60 days after the distribution; or (2) you can request a direct rollover to an IRA or another eligible retirement plan. Unless you roll over your benefit to a Roth IRA, your rollover will not be taxed until you take it out of the IRA or other eligible Plan. Therefore, you will pay no tax on it in the current year and no income tax will be withheld from the payment.
If your rollover is to a Roth IRA, your distribution from the Plan will be subject to Federal income tax (and, where applicable, state income tax) in the year of the rollover distribution, but if you satisfy certain requirements, future distributions from the Roth IRA will not be subject to Federal income tax (and, where applicable, state income tax). You may only directly rollover your Roth account in the Plan to an eligible plan that accepts Roth contributions or a Roth IRA. If you request a direct rollover and you are married, you and your spouse must consent in writing to waive any available annuity payments.
Most payments that you receive from the Plan will be an eligible rollover distribution. However, the following are not considered an eligible rollover distribution: the portion of any payment that is required by law because you have attained age 70-1/2, part of substantially equal periodic payments paid over 10 or more years, a hardship distribution, a loan, or a return of excess contributions. The Plan Administrator will provide you with more information regarding rollovers when you terminate employment. The Plan must withhold 20% of any eligible rollover distribution for federal income taxes if you take a distribution and deposit it in an IRA or another eligible retirement plan within 60 days after the distribution. The plan does not withhold anything on a direct rollover. . This means that if you take your distribution in cash and then wish to roll it over, you will need to use your own funds to cover the 20% that has been withheld (which will be reported to the IRS and credited against your tax liability). The exception is for qualified Roth distributions discussed below.
An additional tax equal to 10% of the taxable amount must also be paid if the payment is made before you attain age 59-1/2, you die, or you become totally disabled, and the funds are not rolled over into an IRA or other eligible retirement plan. A few limited exceptions apply to this rule. For example, if you terminate employment on or after age 55 and take a distribution from the Plan, the additional 10% tax is not triggered.
The tax rules that apply to your Roth contributions and accumulated earnings are different. Roth contributions are taxed when you contribute them to the Plan. Generally, earnings on your Roth contributions will grow tax free—as long as you keep the Roth contributions and related earnings in the Plan for at least five years and do not withdraw them before you reach age 59-½, die or become disabled. The five year period commences when you first make a Roth contribution to the Plan. With Roth contributions, you do not pay federal income taxes on the contributions or earnings upon withdrawal as long as you satisfy the holding and distribution requirements. However, withdrawals of earnings on Roth contributions not meeting these requirements are taxable on distribution.
The federal income tax aspects of payments from the Plan are complex and subject to change. Furthermore, applicable tax treatment under state and local law may differ. You or your beneficiary should consult your tax advisor regarding the financial impact of any payments that you receive from the Plan.