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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Qualified for a full pot lump-sum of my UK pension with a protected retirement age in the UK which is 55.  This is a non-qualified IRS plan.  Will claim on US taxes, but is this subject to the IRS early distribution penalty?

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14 Replies
Anonymous
Not applicable

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Topic Number 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs

To discourage the use of retirement funds for purposes other than normal retirement, the law imposes an additional 10% tax on certain early distributions from certain retirement plans. The additional tax is equal to 10% of the portion of the distribution that's includible in gross income. Generally, early distributions are those you receive from a qualified retirement plan or deferred annuity contract before reaching age 59½. The term qualified retirement plan means:


A qualified employee plan under section 401(a), such as a section 401(k) plan

A qualified employee annuity plan under section 403(a)

A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or

An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs)


your foreign pension would not be a qualified plan and tthus no early withdrawl penalty.

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

I have similar case , what is the distribution code BOX 7 on the 1099-R to be selected for manually entering on software? My foreign fund did not provide 1099R.

DaveF1006
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Yes, you will enter a Code 7, which is normal distribution code.

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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Thanks and how to handle no withdrawal penalty? My foreign pension would not be a qualified plan is there a letter I need to add ?

KrisD15
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Code "7" will indicate a "Normal" distribution and therefore will not trigger an early withdrawal penalty. 

 

Tax on foreign pensions are regulated on the rules stated in that country's tax treaty. 

 

HERE is more information about foreign pensions and tax treaties. 

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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

The Foreign entity is based in India and is party of Double taxation treaty. There is no India tax and i wont be filing any form 1116 foreign tax credit

Do you know how to claim early withdrawal penalty exemption , I don't see any matching codes, Can I attach letter or fill a form for exemption on penalty?

 

AmyC
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

No, you don't need to do anything extra. Enter the 1099-R. Code 7 is good for a regular distribution of substantially equal periodic payments - a pension.  This will prevent needing to file form 5329 to abate a penalty. Use Form 5329 if you are required to pay a penalty.

 

See

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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Appreciate your inputs.

I looked at the 1099-R PDF. Under Box 7 should I select Early distribution Code 1 (no exemption) or Box 2  (exemption applies) In page 16 nothing matches my case , which exemption do you advise to be used for code 2?

 

The foreign pension plan matured after 20 years and I took a distribution before 59 1/2 years. the company does not provide 1099-R so I am manually entering in TT desktop as follows.

 

Line 1- Gross distribution is USD converted amount of lumpsum distribution. for eg $3000

Line 2a Taxable amount is net of annual contributions  made (for eg $800 converted to USD that day in past)

Line 3- is net amount $2200 (on which I will end up paying Ordinary tax)

 

DaveF1006
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

 It depends.  If you do not have an exception that matches your case, you would need to choose Code 1. 

 

@valleybuy

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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

it was early withdrawal dues to the pension maturing hence claiming the exemption for penalty

Does line 2a, line 3 sound correct as there is no 1099-R?

DaveF1006
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

It depends. In viewing Publication 575, I do not see an exception for a pension maturing or any wording to that effect. The exceptions I see are:

 

General exceptions.

  1. The tax doesn’t apply to distributions that are:
  2. 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 expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service) (see Substantially equal periodic payments, later);
  3. Made because you are totally and permanently disabled 
  4. Made to you because you have received a certification that you are terminally ill; or
  5. Made on or after the death of the plan participant or contract holder

There are other exceptions listed in this publication that relate to qualified retirement plans but the exceptions I just listed apply to all retirement plans. 

 

If you are entering manually, you would enter $3000 in Box 1 and $800 in Box 2.  Box 3 is blank because it is not the net income taxable but represents a capital gain to be reported on your return. LEAVE THIS BLANK. The program automatically determines your ordinary gain with the information recorded in Box 1 and 2A. 

 

@valleybuy 

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Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Since I dont have 1099-R as its foreign pension fund or payer TIN etc can I show it in schedule 1 8z as other income ?

 

sorry I mistyped Line 2a in my question, it should be $2200 (full distribution $3000 - $800 premium payments converted to USD)

DaveF1006
Employee Tax Expert

Is a distribution from a foreign pension (lump-sum) subject to IRS early withdrawal penalty?

Yes, you can declare it as other income. Here are your steps.

 

  1. Go to federal>income and expenses>all income>>show more 
  2. Less Common Income> Start
  3. Miscellaneous Income,>start
  4. Other reportable income>start
  5. Next screen asks Any Other Taxable Income>yes
  6. The next screen will allow you to report the income with a brief explanation. in this case, you would enter Foreign Pension  and then the taxable amount of the pension.

@valleybuy 

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