A qualified retirement plan is any plan that meets specific rules outlined in the Internal Revenue Code. It can be a defined benefit pension plan or a defined contribution plan such as a 401(k), 403(b) or 457. Generally, any benefits you receive from a qualified plan are treated as income for tax purposes. In addition to federal income taxes, you may also have to pay withholding tax on a retirement plan distribution.
Defined benefit pension plans are designed to give you a steady stream of income in retirement. Your employer makes contributions and you're guaranteed a set amount of money in your golden years. Typically, benefits are paid as a lifetime monthly annuity, although some plans may allow lump-sum payments. If you're receiving periodic payments from a pension or annuity, you'll need to complete IRS Form W-4P to designate your withholding allowances. You can use this form to elect no withholding, but you may need to make estimated quarterly payments to make sure you don't end up owing money at tax time.
Qualified Plan Rollovers
If you plan to roll your retirement benefits into another qualified plan, the money may be subject to federal withholding, depending on how the rollover is completed. If you request a direct rollover, your plan administrator will transfer the money to the new retirement account on your behalf and there is no withholding. If your plan doesn't allow for direct rollovers or you specifically ask for the money to be sent to you, 20 percent of the distribution is automatically withheld for taxes. If you're rolling money over from an IRA-based plan, such as a simplified employee pension or a SIMPLE IRA, the withholding amount is only 10 percent, but you can opt out.
The Internal Revenue Service also requires you to pay federal withholding on non-periodic payments from qualified plans and payments sent outside the U.S. As of 2013, the withholding rate for non-periodic distributions other than a rollover is 10 percent of the distribution amount. This includes any part of a retirement loan you do not repay. You can use Form W-4P to request an additional withholding amount or elect no withholding. If you're a U.S. citizen receiving periodic or non-periodic payments outside the U.S., you can't elect to be exempt from federal withholding.
When completing an indirect rollover of retirement funds, you'll have to make up the amount that was withheld to avoid paying additional taxes. If you don't make up the difference, the money is treated as a distribution and subject to federal income taxes. The entire distribution amount will be treated as taxable income if you don't complete the rollover within 60 days. If you take a distribution from a qualified plan before age 59 1/2, you may be subject to a 10 percent early withdrawal penalty as well as regular income taxes.
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