A Brief Look At Pension Tax Relief
There are ways for you to get some pension tax relief from the United States government. The government provides incentives and some benefits when you opt to save for your retirement. As a way to encourage you to continue saving for your retirement, the government imposes additional taxes on early withdrawals of retirement funds. It also requires additional taxes when you accumulate excess pension funds after your retirement.
If you draw out funds from your retirement fund before you reach the age of 59 ½, you may be subject to an additional 10% tax on any distributions you get qualified plans and nonqualified annuity contracts. There are certain exceptions to this rule on early distributions. You are not subject to the 10% tax if you are receiving distributions in substantially equal periodic payments for your life or your designated beneficiary’s life. The payments must come from a qualified retirement plan and they must begin after separation from service. Another exception is that you are not subject to the 10% tax if you are totally and permanently disabled. And, distributions made after your death are also not subject to the 10% early withdrawal tax. Other exceptions to the tax on early withdrawals are: 1.) Distributions made after you separate from service and reach the age of 55 or later; 2.) Distributions made to an alternate payee; 3.) Distributions made to the extent that you have medical expenses that are more than 7.5% of your adjusted gross income; 4.) Payment on dividends in your stock ownership plan; and 5.) Distributions due to an IRS levy.
To benefit from pension tax relief, there are some requirements that you must follow. To avoid additional tax, you must start receiving distributions by April 1st of the year following the calendar year in which you reach age 70 ½ or you retire from your employer that maintains the retirement plan. However, if you are still working after age 70 ½ and your plan requires you to start receiving distributions by April 1st of the year following the calendar in which you reach age 70 ½, then that will be your required starting date.
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