Chapter 7
Retirement and Annuity Income
For employees, coverage in a qualified employer retirement plan is a valuable fringe benefit, as employer contributions are tax free within specified limits. Certain salary-reduction plans allow you to make elective deferrals of salary that are not subject to income tax. An advantage of all qualified retirement plans is that earnings accumulate tax free until withdrawal.
Along with tax savings opportunities come technical restrictions and pitfalls. For example, retirement plan distributions eligible for rollover are subject to a mandatory 20% withholding tax if you receive the distribution rather than asking your employer to make a direct trustee-to-trustee transfer of the distribution to an IRA or another qualified employer plan.
This chapter discusses tax treatment of annuities and employer plan distributions, including how to avoid tax penalties, such as for distributions before age 59½. These distribution rules also generally apply to plans for self-employed individuals; retirement plans for self-employed individuals are discussed further in Chapter 41.
IRAs are discussed in Chapter 8.
A tax credit is available to low-to-moderate income taxpayers who make traditional or Roth IRA contributions, electives deferrals to a 401(k) or other employer plan, and voluntary after-tax contributions to a qualified plan. The credit is discussed in Chapter 25.
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