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Special Tax Notice Regarding TRS Payments
Rev. 04-08
This notice explains how you can continue to defer federal income tax on your retirement savings in the Teacher Retirement System of Texas (TRS) and contains important information you will need before you decide how to receive your TRS benefits.
This notice is provided to you by TRS because all or part of the payment that you will soon receive from TRS may be eligible for rollover by you or TRS to an IRA or an eligible employer plan. A rollover is a payment by you or TRS of all or part of your benefit to another plan or IRA that allows you to continue to postpone taxation of that benefit until it is paid to you. (However, see Special Rules for Rollover to Xxxx IRAs, below, regarding taxation of a payment rolled to a Xxxx XXX.) Your payment cannot be rolled over to a SIMPLE IRA or a Xxxxxxxxx Education Savings Account (formerly known as an education IRA).
An "eligible employer plan" includes a plan qualified under Section 401(a) of the Internal Revenue Code, including a 401(k) plan, profit-sharing plan, defined benefit plan, stock bonus plan, and money purchase plan; a Section 403(a) annuity plan; a Section 403(b) tax-sheltered annuity; and an eligible Section 457(b) plan maintained by a governmental employer (governmental 457 plan). Note that for a distribution made after December 31, 2007, your payment also can be rolled over to a Xxxx XXX subject to the same limits that apply to rollovers from a traditional IRA to a Section 408A Xxxx XXX (i.e., for tax years prior to January 1, 2010, your adjusted gross income cannot exceed $100,000 and you must not be married filing separately).
An eligible employer plan is not legally required to accept a rollover. Before you decide to roll over your payment to another employer plan, you should find out whether the plan accepts rollovers and, if so, the types of distributions it accepts as a rollover. You should also find out about any documents that are required to be completed before the receiving plan will accept a rollover. Even if a plan accepts rollovers, it might not accept rollovers of certain types of distributions, such as after-tax amounts. If this is the case, and your distribution includes after-tax amounts, you may wish instead to roll your distribution over to an IRA or split your rollover amount between the employer plan in which you will participate and an IRA. If an eligible employer plan accepts your rollover, the plan may restrict subsequent distributions of the rollover amount or may require your spouse's consent for any subsequent distribution. A subsequent distribution from the plan that accepts your rollover may also be subject to different tax treatment than distributions from TRS. Check with the
a SIMPLE IRA or a Xxxxxxxxx Education Savings Account because these are not traditional IRAs. A Xxxx XXX also is not a traditional IRA. (See Special Rules for Rollover to Xxxx IRAs below.)
The taxable portion of your payment will be taxed later when you take it out of the traditional IRA or the eligible employer plan. Depending on the type of plan, the later distribution may be subject to different tax treatment than it would be if you received a taxable distribution from TRS.
Special Rules for Rollover to Xxxx IRAs. Note that for a distribution made after December 31, 2007, you can choose a rollover to a Xxxx XXX subject to the same limits that apply to rollovers from a traditional IRA to a Xxxx XXX (i.e., for tax years prior to January 1, 2010, your adjusted gross income cannot exceed $100,000 and you must not be married filing separately). IF YOU MAKE A ROLLOVER OF YOUR DISTRIBUTION TO A XXXX XXX, THE TAXABLE AMOUNT OF YOUR DISTRIBUTION WILL BE INCLUDED IN YOUR TAXABLE
INCOME for the year in which the distribution was made by TRS (except for any portion of the distribution that represents a return of your after-tax contributions to TRS). You may be able to elect to delay recognizing the distribution as part of your taxable income until 2011 and 2012 if you elect a rollover to a Xxxx XXX in the 2010 taxable year. A rollover of your distribution to a Xxxx XXX avoids the 10% tax on early distributions received prior to the date you reach age 59 1/2, become disabled, or retire under the terms of the TRS plan, subject to rules on conversion. Note: TRS is not responsible for assuring your eligibility to make a rollover to a Xxxx XXX (IRS Notice 2008-30). See Section III, below for more information. You should consult your tax advisor if you are interested in rolling over your distribution to a Xxxx XXX.
Rollover-eligible Payments Paid to You. If you choose to have a TRS payment that is eligible for rollover PAID TO YOU:
You will receive only 80% of the taxable amount of the payment because TRS is required to withhold 20% of that amount and send it to the IRS as income tax withholding to be credited against your taxes.
The taxable amount of your payment will be taxed in the current year unless you roll it over. Under limited circum- stances, you may be able to use special tax rules that could reduce the tax you owe. However, if you receive the payment before age 59 1/2, you may have to pay an additional 10% tax. See special note below for qualified public safety employees.
administrator of the plan that is to receive your rollover prior to making the rollover.
If you have additional questions after reading this notice, you can contact TRS at 0-000-000-0000 or by writing to the Teacher Retirement System of Texas, 0000 Xxx Xxxxx Xxxxxx, Xxxxxx, Xxxxx 00000-0000. You may also go to the TRS Web site at xxx.xxx.xxxxx.xx.xx.
SUMMARY
There are two ways you may be able to receive a TRS payment that is eligible for rollover: (1) Certain payments can be made directly to an IRA that you establish or to an eligible employer plan that will accept it and hold it for your benefit ("DIRECT ROLLOVER"); or (2) The payment can be PAID TO YOU.
If you choose a DIRECT ROLLOVER to a traditional IRA or an eligible employer plan:
Your payment will not be taxed in the current year and no income tax will be withheld. (See Special Rules for Rollover to Xxxx IRAs, below.)
You can roll over all or part of the payment by paying it to your IRA or to an eligible employer plan that accepts your rollover within 60 days after you receive the payment. The amount rolled over to a traditional IRA or eligible employer plan will not be taxed until you take it out of the traditional IRA or the eligible employer plan.
If you want to roll over up to 100% of the payment to a traditional IRA or an eligible employer plan, you must find other money to replace the 20% of the taxable portion that was withheld. If you roll over only the 80% that you received, you will be taxed on the 20% that was withheld and that is not rolled over.
Qualified Public Safety Employees. On or after August 18, 2006, if you are a "qualified public safety employee" who terminates employment in the calendar year in which you are age 50 or older, and receive an eligible rollover distribution, you will not have to pay the additional 10% tax on a payment that is eligible for rollover and PAID TO YOU. You are a "qualified public safety employee" if you are an employee of the State or a political subdivision of the State (such as a city or county) whose principal duties include services requiring specialized training in
You choose whether your payment will be made directly to
your traditional IRA or to an eligible employer plan that accepts your rollover. Your payment cannot be rolled over to
the area of police protection, fire-fighting services, or emergency medical services for an area within the jurisdiction of the State or political subdivision.
Your Right to Waive the 30-Day Notice Period. Generally, neither a direct rollover nor a payment can be made from TRS until at least 30 days after your receipt of this notice. Thus, after receiving this notice, you have at least 30 days to consider whether or not to have your withdrawal directly rolled over. If you do not wish to wait until this 30-day notice period ends before your election is processed, you may waive the notice period by making an affirmative election indicating whether or not you wish to make a direct rollover. Your withdrawal will then be processed in accordance with your election as soon as practical after it is received by TRS.
MORE INFORMATION
I. PAYMENTS THAT CAN AND CANNOT BE ROLLED OVER
Payments from TRS may be "eligible rollover distributions." This means that they can be rolled over to a traditional IRA or to an eligible employer plan that accepts rollovers or beginning January 1, 2008, they can be rolled over to a Xxxx XXX. Payments from TRS cannot be rolled over to a SIMPLE IRA or a Xxxxxxxxx Education Savings Account. TRS should be able to tell you what portion of your payment is an eligible rollover distribution.
After-Tax Contributions. If you made after-tax contributions to TRS, these contributions may be rolled into either a traditional IRA or to certain employer plans that accept rollovers of the after-tax contributions. The following rules apply:
a) Rollover into a traditional IRA. You can rollover your after-tax contributions to a traditional IRA either directly or indirectly. TRS should be able to tell you how much your payment is the taxable portion and how much is the after-tax portion.
If you roll over after-tax contributions to a traditional IRA, it is your responsibility to keep track of, and report to the Internal Revenue Service on the applicable forms, the amount of these after-tax contributions. This will enable the non-taxable amount of any future distributions from the traditional IRA to be determined.
Once you roll over your after-tax contributions to a traditional IRA, those amounts CANNOT later be rolled over to an employer plan.
b) Rollover into an Employer Plan. Beginning January 1, 2007, you can roll over after-tax contributions from an employer plan that is qualified under Code section 401(a) or 403(a) to another such plan or to a Code section 403(b) annuity plan using a direct rollover if the other plan or annuity contract (defined contribution or defined benefit) provides separate accounting for amounts rolled over, including separate accounting for the after-tax employee contributions and earnings on those contributions. If you want to roll over your after-tax contributions to an employer plan that accepts these rollovers, you cannot have the after-tax contributions paid to you first. You must instruct TRS to make a direct rollover on your behalf. You can also rollover after-tax contributions from an employer plan that is qualified under Code section 401(a) or 403(a) to a traditional IRA; however, you cannot first roll over after-tax contributions to an IRA and then roll over that amount into an employer plan. You CANNOT roll over after-tax contributions to a governmental 457 plan.
Required Minimum Payments. Beginning when you reach age 70 1/2 or retire, whichever is later, a certain portion of your payment cannot be rolled over because it is a "required minimum payment" that must be paid to you. If your distribution is a type of annuity payment payable for less than 10 years, and thus normally eligible for rollover, the entire amount of such a distribution made on or after January 1 of the year in which the TRS participant attains (or would have attained) age 70 1/2 will be treated as a required minimum payment and thus will not be eligible for rollover.
Corrective Distributions. A distribution that is made because legal limits on certain contributions were exceeded cannot be rolled over.
TRS should be able to tell you if your payment includes amounts that cannot be rolled over.
II. DIRECT ROLLOVER
A DIRECT ROLLOVER is a direct payment of the amount of your TRS benefits to an IRA or an eligible employer plan that will accept it. You can choose a DIRECT ROLLOVER of all or any portion of your payment that is an eligible rollover distribution, as described in Part I above.
For a DIRECT ROLLOVER to a traditional IRA or eligible employer plan, you are not taxed on any taxable portion of your payment for which you choose a DIRECT ROLLOVER until you later take it out of the traditional IRA or eligible employer plan. For a DIRECT ROLLOVER to a Xxxx XXX, you will be taxed on the taxable portion of your payment for which you choose a DIRECT ROLLOVER in the year in which the distribution from TRS is made.
In addition, no income tax withholding is required for any taxable portion of your TRS benefits for which you choose a DIRECT ROLLOVER. However, a rollover to a Xxxx XXX results in a taxable distribution in the year it is paid by TRS; so, if you choose a DIRECT ROLLOVER to a Xxxx XXX, TRS will withhold according to a voluntary withholding agreement, if you want an amount withheld for federal income tax. If you are under age 59 1/2 and elect withholding when you make a rollover to a Xxxx XXX, consult a tax advisor about whether the withheld amount is subject to the additional 10% tax on early distributions.
DIRECT ROLLOVER to an IRA. You can open a traditional IRA or, beginning January 1, 2008, a Xxxx XXX to receive the direct rollover. If you choose to have your payment made directly to an IRA, contact an IRA sponsor (usually a financial institution) to find out how to have your payment made in a direct rollover to an IRA at that institution. If you are unsure of how to invest your money, you can temporarily establish an IRA to receive the payment. However, in choosing an IRA, you may wish to make sure that the IRA you choose will allow you to move all or part of your payment to another IRA at a later date, without penalties or other limitations. See IRS Publication 590, Individual Retirement Arrangements, for more information on IRAs (including limits on how often you can roll over between IRAs).
The following types of payments cannot be rolled over: DIRECT ROLLOVER to a Plan. If you are employed by a new
employer that has an eligible employer plan, and you want a
Payments Spread Over Long Periods. You cannot roll over a
payment if it is part of a series of equal (or almost equal) payments that are made at least once a year and that will last for:
direct rollover to that plan, ask the plan administrator of that plan whether it will accept your rollover. An eligible employer plan is not legally required to accept a rollover. Even if your new employer's plan does not accept a rollover, you can choose
your lifetime (or a period measured by your life expectancy), or
your lifetime and your beneficiary's lifetime (or a period measured by your joint life expectancies), or
a period of 10 years or more.
a DIRECT ROLLOVER to an IRA. If the employer plan accepts your rollover, the plan may provide restrictions on the circumstances under which you may later receive a distribution of the rollover amount or may require spousal consent to any subsequent distribution. Check with the plan administrator of that plan before making your decision.
DIRECT ROLLOVER of a Series of Payments. If you receive a payment that can be rolled over to an IRA or an eligible employer plan that will accept it, and it is paid in a series of payments for less than 10 years, your choice to make or not make a DIRECT ROLLOVER for a payment will apply to all later payments in the series until you change your election. You are free to change your election for any later payment in the series.
was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the traditional IRA or the eligible employer plan, to replace the 20% that was withheld. On the other hand, if you roll over only the 80% of the taxable portion that you received, you will be taxed on the 20% that was withheld.
Change in Tax Treatment Resulting from a DIRECT ROLLOVER. The tax treatment of any payment from the eligible employer plan or IRA receiving your DIRECT ROLLOVER might be different than if you received your benefit in a taxable distribution directly from TRS. For example, if you were born before January 1, 1936, you might be entitled to ten-year averaging or capital gain treatment, as explained below. However, if you have your benefit rolled over to a section 403(b) tax-sheltered annuity, a governmental 457 plan, or an IRA in a DIRECT ROLLOVER, your benefit will no longer be eligible for that special treatment. See the sections below entitled "Additional 10% Tax if You Are under Age 59 1/2" and "Special Tax Treatment if You Were Born before January 1, 1936."
III. PAYMENT PAID TO YOU
If your payment can be rolled over (see Part I above) and the payment is made to you in cash, it is subject to 20% federal income tax withholding on the taxable portion. The payment is taxed in the year you receive it unless, within 60 days, you roll it over to an IRA or an eligible employer plan that accepts rollover. If you do not roll it over, special tax rules may apply.
INCOME TAX WITHHOLDING:
Mandatory Withholding. If any portion of your payment can be rolled over under Part I above and you do not elect to make a DIRECT ROLLOVER, TRS is required by law to withhold 20% of the taxable amount. This amount is sent to the IRS as federal income tax withholding. For example, if you can roll over a taxable payment of $10,000, only $8,000 will be paid to you because TRS must withhold $2,000 as income tax. However, when you prepare your income tax return for the year, unless you make a rollover within 60 days (see "Sixty-Day Rollover Option" below), you must report the full $10,000 as a taxable payment from TRS. You must report the $2,000 as tax withheld, and it will be credited against any income tax you owe for the year. There will be no income tax withholding if your payments for the year are less than $200.
Voluntary Withholding. If any portion of your payment is taxable but cannot be rolled over under Part I above, the mandatory withholding rules described above do not apply. In this case, you may elect not to have withholding apply to that portion. If you do nothing, an amount will be taken out of this portion of your payment for federal income tax withholding. To elect out of withholding, ask TRS for the election form and related information.
Sixty-Day Rollover Option. If you receive a payment that can be rolled over under Part I above, you can still decide to roll over all or part of it (except after-tax amounts) to an IRA or to an eligible employer plan that accepts rollovers. If you decide to roll over, you must contribute the amount of the payment you received to an IRA or eligible employer plan within 60 days after you receive the payment. Unless you rollover your distribution to a Xxxx XXX, the portion of your payment that is rolled over will not be taxed until you take it out of the IRA or the eligible employer plan. If you rollover to a Xxxx XXX, the distribution will be included in
Example: The taxable portion of your payment that can be rolled over under Part I above is $10,000, and you choose to have it paid to you. You will receive $8,000, and $2,000 will be sent to the IRS as income tax withholding. Within 60 days after receiving the $8,000, you may roll over the entire
$10,000 to a traditional IRA or an eligible employer plan. To do this, you roll over the $8,000 you received from TRS, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the traditional IRA or an eligible employer plan. If you roll over the entire $10,000, when you file your income tax return you may get a refund of part or all of the $2,000 withheld.
If, on the other hand, you roll over only $8,000, the $2,000 you did not roll over is taxed in the year it was withheld. When you file your income tax return, you may get a refund of part of the $2,000 withheld. (However, any refund is likely to be larger if you roll over the entire $10,000.)
Additional 10% Tax If You Are Under Age 59 1/2. If you receive a payment before you reach age 59 1/2 and you do not roll it over, then, in addition to the regular income tax, you may have to pay an extra tax equal to 10% of the taxable portion of the payment. The additional 10% generally does not apply to (1) payments that are paid after you separate from service with your employer during or after the year you reach age 55, (2) payments that are paid because you retire due to disability, (3) payments that are paid as equal (or almost equal) payments over your life or life expectancy (or your and your beneficiary's lives or life expectancies), after you separate from service (4) payments that are paid directly to the government to satisfy a federal tax levy,
(5) payments that are paid to an alternate payee under a qualified domestic relations order, (6) payments that do not exceed the amount of your deductible medical expenses, or (7) payments to a qualified public safety employee who separates from service during or after the year reaching age 50. If you make a rollover to a Xxxx XXX and elect withholding, consult a tax advisor about whether the withheld amount is subject to the additional 10% tax on early distributions. See IRS Form 5329 for more information on the additional 10% tax.
Special Tax Treatment If You Were Born Before January 1, 1936. If you receive a payment from a qualified plan under section 401(a) that can be rolled over under Part I and you do not roll it over to a traditional IRA or an eligible employer plan, the payment will be taxed in the year you receive it. However, if the payment qualifies as a "lump sum distribution," it may be eligible for a special tax treatment. A lump sum distribution is a payment, within one year, of your entire balance under TRS (and certain other similar plans of the employer) that is payable to you after you have reached age 59 1/2 or because you have separated from service with your employer (or, in the case of a self-employed individual, after you have reached age 59 1/2 or have become disabled). For a payment to be treated as a lump sum distribution, you must have been a participant in TRS for at least 5 years before the year in which you received the distribution. The special tax treatment for lump sum distributions that may be available to you is described below.
your taxable income for the year in which it was paid to you by TRS.
If you want to roll over a payment you received to a traditional IRA or eligible employer plan, you can roll over up to 100% of your payment that can be rolled over under Part I above, including an amount equal to the 20% of the taxable portion that
Ten-Year Averaging. If you receive a lump sum distribution and you were born before January 1, 1936, you can make a one-time election to figure the tax on the payment using "10-year averaging" (using 1986 tax rates). Ten-year averaging often reduces the tax you owe.
Capital Gain Treatment. If you receive a lump sum distribution and you were born before January 1, 1936 and if you were a participant in TRS before 1974, you may elect to have the part of your payment that is attributable to your pre-1974 participation in TRS taxed as long-term capital gain at a rate of 20%.
Beginning January 1, 2008, you may choose a DIRECT ROLLOVER to an inherited Xxxx XXX. You cannot choose a direct rollover to an eligible employer plan, and you cannot rollover the payment yourself. If you choose to have the distribution PAID TO YOU, the mandatory withholding rules discribed in Part III above do not apply to you.
There are other limits on the special tax treatment for lump sum distributions. For example, you can generally elect this special tax treatment only once in your lifetime, and the election applies to all lump sum distributions that you receive in that same year. You may not elect this special tax treatment if you rolled amounts into TRS from a 403(b) tax-sheltered annuity contract, a governmental 457 plan, or from an IRA not originally attributable to a qualified employer plan. If you have previously rolled over a distribution from TRS (or certain other similar plans of the employer), you cannot use this special averaging treatment for later payments from TRS. If you roll over your payment to an IRA, governmental 457 plan, or 403(b) tax-sheltered annuity, you will not be able to use special tax treatment for later payments from that IRA, plan, or annuity. Also, if you roll over only a portion of your payment to an IRA, governmental 457 plan, or 403(b) tax-sheltered annuity this special tax treatment is not available for the rest of the payment. See IRS Form 4972 for additional information on lump sum distributions and how you elect the special tax treatment.
IV. RETIRED PUBLIC SAFETY OFFICERS
If you are an "eligible retired public safety officer" (as defined by the Pension Protection Act of 2006 ("PPA")), you may make an election to exclude from federal gross income up to $3,000 of your retirement plan benefits used for "qualified" health insurance or long term care insurance premiums. An eligible public safety officer must be separated from service due to disability or attainment of normal retirement age. Consult your tax preparer to determine if you qualify for the PPA definition of public safety officer and to determine which premium payments qualify.
If you want to take advantage of this exclusion, you must report the amount claimed on Form 1040. The instructions to Form 1040 explain that the taxable amount received from the Plan (i.e., from TRS), reduced by the amount of qualified premiums deducted and paid by the Plan (not to exceed $3,000), must be entered on line 16b of the Form 1040. Next to the entry, in the margin, you must write the letters "PSO." This is an annual election--you will need to report the exclusion for each year in which you want to claim the exclusion. Note: The Form 1099-R that you receive from TRS will report this amount as taxable.
VII. SPECIAL RULES FOR SURVIVING SPOUSES, ALTERNATIVE PAYEES, AND OTHER BENEFICIARIES
If you are a surviving spouse, an alternate payee, or another beneficiary, you may be able to use the special tax treatment for lump sum distributions, as described in Part III above. If you receive a payment because of the employee's death, you may be able to treat the payment as a lump sum distribution if the employee met the appropriate age requirements, whether or not the employee had 5 years of participation in TRS.
If you are a surviving spouse, an alternate payee, or another beneficiary, your payment is generally not subject to the additional 10% tax described in Part III above, even if you are younger than age 59 1/2.
VIII. HOW TO OBTAIN ADDITIONAL INFORMATION
IX. INFORMATION SPECIFIC TO TRS
Your election to rollover or to have a payment paid to you is irrevocable and cannot be changed after TRS has mailed or otherwise transmitted the payment either in the form of a rollover or in the form of a payment paid to you.
V. SURVIVING SPOUSES AND ALTERNATE PAYEES
In general, the rules summarized above that apply to payments to employees also apply to payments to surviving spouses of employees and to spouses or former spouses who are "alternate payees." You are an alternate payee if your interest in TRS results from a "qualified domestic relations order," which is an order issued by a court, usually in connection with a divorce or legal separation.
If you are a surviving spouse or an alternate payee, you may choose to have a payment that can be rolled over, as described in Part I above, paid in a DIRECT ROLLOVER to an IRA or to an eligible employer plan or paid to you. If you have the payment paid to you, you can keep it or roll it over yourself to a traditional IRA or to an eligible employer plan. Thus, you have the same choices as the employee.
VI. BENEFICIARIES
If you are a beneficiary other than a surviving spouse or an alternate payee, and you receive a distribution on or after January 1, 2007, you can choose to be paid in a DIRECT ROLLOVER to a traditional IRA, which will be treated as an inherited IRA subject to the minimum distribution rules applicable to beneficiaries.