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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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.
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.
Yes, you will enter a Code 7, which is normal distribution code.
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 ?
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.
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?
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
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)
It depends. If you do not have an exception that matches your case, you would need to choose Code 1.
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?
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.
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.
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)
Yes, you can declare it as other income. Here are your steps.
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