section 1 - The American College Online Learning Center

7. Pre-59½ penalty taxtax rate in most cases. Otherwise, it’s tricky to know when to elect NUAtreatment as factors such as how long the individual expects to hold thestock, portfolio diversification considerations, and expectations aboutfuture tax rates are all factors in the decision.a. The 10% penalty on the taxable portion of a distribution prior to age 59½b. Applies to distributions from qualified plans, 403(b), 457, SEPs, SIMPLES, IRAs,and in some cases Roth IRAs (distributing income from a Roth and the distributionis not a qualified tax-free distribution)c. There are many exceptions to the penalty tax.(1) The exceptions that apply to all plans include:(a) Distributions after the death of participant (no 10% penalty)(b) Distributions due to the participant’s disability (no 10% penalty)(c) Distributions for deductible medical expenses (no 10% penalty)(d) A distribution that is part of a stream of “substantially equal periodicpayments” (no 10% penalty)(2) The exceptions that apply to qualified plans include:(a) Withdrawals upon separation from service after attaining age 55are not subject to the penalty tax (no 10% penalty)(b) Applies to qualified plans and 403(b) plans(c) This exception does not apply once a distribution is rolled overto an IRA.(3) The exceptions that apply to IRAs (including SEPs and SIMPLEs) include:(a) Higher education expenses (college) for the participant or familymember (no 10% penalty)(b) Up to $10,000 of first-time home buying expense for the participantor family member—this is a one time exception looking at all IRAs(no 10% penalty)(c) Heath insurance premiums paid for those unemployed receivingunemployment insurance (no 10% penalty)8. Tax deductible plan checklist. The general rule is for distributions to be taxed as ordinaryincome. However, ask these questions:a. Is a portion of the distribution attributable to a 401(k) Roth account? – Thedistribution may be tax-free.b. Has the recipient attained age 59½? – The distribution may be subject to a10% penalty tax.c. Is there any cost basis in the plan? – The basis will be recovered tax-freeaccording to a pro-rated formula.d. Is there a distribution of employer stock or does the participant have the optionto receive employer stock? – The distribution may be taxed at capital gains rateif it qualifies as NUA.e. Is the recipient a death beneficiary and not the participant? – If there were estatetaxes paid because of the pension, then the client may be entitled to a deduction.9. The rules for the tax treatment of a tax-exempt plan are different.4.9