What are the tax considerations regarding a distribution of after-tax
funds from a profit sharing/savings plan? I have some after-tax
funds in my account that were put into the account many years ago,
before the before-tax option was available. The account statement
shows these after-tax funds in the amount of about $56,000, a relatively
small amount compared to the total in the account. I'm assuming
that I can take that exact amount from the account and not have
to owe any taxes on it. Could you advise me on this matter?
If you already paid tax on some of your pension plan assets, you're
right to assume that you won't have to pay tax on that money when
it comes out. Unfortunately though, out of every payment you receive
from the plan you have to split it between recovering your cost and
the part that is taxable.
How you go about recovering your basis depends if you're taking
periodic payments or nonperiodic payments. Periodic payments are
when you've reached your retirement age and begin to withdraw a
fixed monthly income over a certain time period, such as your remaining
life expectancy or that of yours and your spouse's. A nonperiodic
payment is an occasional withdrawal of funds either before or after
reaching the age that you have to take minimum withdrawals.
If you're taking periodic withdrawals, the Internal
Revenue Service has a simplified method for figuring the cost to
be recovered. It's called the simplified method and is discussed
Publication 575, Pension and Annuity Income. Basically, you
take your cost in the plan and divide it by the number of payments
to be received. If you die before getting your full cost recovered
your estate can claim a deduction on your final 1040.
If you receive a nonperiodic distribution before you
start to make regular (periodic) withdrawals from your pension,
then the amount you withdraw comes out in the proportion that is
your cost to the total account balance. For example, if your cost
is $56,000 and your account balance was $560,000, then 10 percent
of your withdrawals would be recovery of your cost and tax-free.
If you already started making regular withdrawals and decide to
make an additional withdrawal, you usually have to include the full
amount in income and continue to recover your cost over your remaining
periodic payments. However, there are three limited exceptions to
this rule discussed in Publication 575 that you can refer to if