Julie Welch

Periodic Payments


Many retirement plans allow you to take annuity payments. For example, you can withdraw amounts regularly over a period of time, such as $1,000 a month until you die. If your employer fully funded the plan (you did not put any money into the plan) or if you put in some money but it was pre-tax dollars (such as a 401(k) plan), the full amount you receive is taxable. If you made nondeductible contributions, only a portion of the amount you receive is taxable. The rules for calculating the taxable amount vary based on when your payments began.

For annuities beginning before November 20, 1996, you could choose between the general rule and the old simplified general rule. For additional information on these methods, get IRS Publications 575 and 939 by calling 1-800-TAX-FORM.

For annuities with starting dates after November 19, 1996, you use the modified simplified general rule. Under all methods, you calculate the amount you receive tax-free. The remainder is taxable to you.

You use the following formula to calculate the amount you receive tax-free.

Nondeductible contributions you made


Expected number of payments

Under the modified simplified general rule, you base your expected number of payments on your age when your distributions begin and one of the following charts.

Use this chart if your annuity starting date is after December 31, 1997, and your benefits are based on the life of more than one annuitant:


Combined Ages Expected Number of Payments
110 and under 410
111-120 360
121-130 310
131-140 260
141 and over 210







Use this chart if your annuity is calculated on only your life:



Expected number of payments 

for annuities starting after  

Expected number of payments

for annuities starting before  

Age November 18, 1996 November 19, 1996
 55 and under    360  300
 56 - 60  310  260
 61 - 65  260  240
66 - 70  210  170
 71 and over  160  120









You are 62 and begin receiving $500 per month from your retirement plan based on your life expectancy. You made $26,000 of nondeductible contributions to the plan.


Using the modified simplified general rule, your monthly tax-free distribution is $100 ($26,000/260). Thus, you pay tax on only $400 ($500-100) per month.


If your distribution is based on your life and your spouse’s (age 60) life, your monthly tax-free distribution is $83.87 (26,000/310). Thus, you pay tax on only $416.13 ($500 - 83.87) per month.


With the modified simplified general rule, you are spreading the income from your monthly payments, as well as the related income tax, over a period of time.

Lump-sum distributions if you were age 50 before 1986

When you receive a lump-sum distribution from a qualified pension or profit-sharing plan, you may be eligible for preferential income tax treatment. A lump-sum distribution is a payment of your full amount of benefits within one tax year. This amount represents one of the following:

- Distribution made because of your separation from service if you are an employee.

- Distribution made after you reach age 59½.

- Distribution made because of your death .

- Distribution made because of your disability if you are self-employed.

If you reached age 50 before 1986, you may be able to use the ten-year averaging treatment for your distribution. You can use this lump-sum method only once in your life. Alternatively, you can tax your distribution using your regular income tax rates. Compare your tax using the two available methods. Select the one that gives you the lowest result. You use Form 4972 to make these choices.


You are age 69 and receive a lump-sum distribution of $100,000. You have not previously used your lump-sum distribution election. You are in the 35% tax rate bracket. Your tax on the distribution under the two alternatives (using 2011 tax rates) is:

Ordinary income              $35,000
Ten-year averaging            14,471

Thus, if you do not anticipate a future lump-sum distribution, you could elect to use ten-year averaging to achieve the lowest tax on the distribution.


Borrowing money from a qualified retirement plan

You may be able to borrow money from a qualified retirement plan. You must meet the plan requirements for repayment of the principal amount with interest. If you borrow the money to buy your house and you use the house to secure the loan, you can generally deduct the interest. Thus, you pay deductible interest to your retirement plan. The interest is tax-free in your retirement plan until you withdraw the money.

The maximum amounts you can borrow are:


Your vested amount in the plan    Maximum borrowing
$20,000 or less lesser of $10,000 or your vested balance
$20,000 - $100,000 50% of your vested balance
Over $100,000 $50,000


Your plan may set lower amounts or not allow borrowing.

Generally, you must repay a loan from your retirement plan within five years. However, if you borrow the money to buy your principal residence, the five-year limit does not apply.


Julie Welch (Runtz) is the Director of Tax Services for Meara, King & Co. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas.

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