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Teachers' Fund for Retirement

Special Tax Notice Regarding TFFR Refunds, Lump Sum Payments, and Certain Death Benefits (For Distributions Made in 2008 or Later)

View pdf version of Taxation - Refund Benefits

This notice explains how you can continue to defer federal income tax on your retirement distribution from the Teachers’ Fund for Retirement (TFFR) and contains important information you will need before you decide how to receive your benefits.

This notice is provided to you by TFFR because all or part of the payment that you will soon receive from TFFR may be eligible for rollover by you or TFFR to an IRA or an Eligible Employer Plan. A rollover is a payment by you or TFFR of all or part of your benefit to another plan or IRA. If you roll over your distribution to an IRA, you may choose either a Traditional IRA or, if you meet the requirements described below, a Roth IRA. Rolling your distribution over to an Eligible Employer Plan or to a Traditional IRA (but not a Roth IRA) allows you to continue to postpone taxation of that benefit until it is paid to you. Your payment cannot be rolled over to a SIMPLE IRA, or a Coverdell 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).

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 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 TFFR. Check with the administrator of the plan that is to receive your rollover prior to making the rollover.

If you have questions regarding this notice, you can contact the North Dakota Retirement and Investment Office at (701) 328-9885 or toll free (800) 952-2970. You may also want to consult with a professional tax advisor before you take a payment of your benefits from TFFR.

Summary

There are two ways you may receive a TFFR payment that is eligible for rollover: (1) Paid directly by TFFR 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) 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.
Your payment will be made directly to your Traditional IRA or to an Eligible Employer Plan that accepts your rollover.
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 TFFR.

If you choose a Direct Rollover to a Roth IRA :

Not every TFFR member may choose a Direct Rollover to a Roth IRA. You must meet these conditions:
Your Modified Adjusted Gross Income on your federal income tax return in the year of this distribution must be less than $100,000. (However, for distributions in 2010 or later, there is no ceiling on your income to elect a rollover to a Roth IRA ).
You must not file your federal income taxes as Married, filing Separately.
Your payment will be subjuect to income tax in the year it is distributed. However, no income tax withholding is required on your rollover, so you should make sure you have sufficient other funds available to pay the income taxes on the amount you roll over.
Distributions from the Roth IRA in later years will not be subject to federal income tax, if you comply with the Roth IRA requirements:
No distributions may be made until you have participated in the Roth IRA for five years.
No distributions may be made before you reach age 59½ except on account of death or disability.

If you choose to have your TFFR payment that is eligible for rollover paid to you:

You will receive only 80% of the taxable amount, because TFFR is required to withhold 20% 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 to a Traditional IRA or an Eligible Employer Plan. Under limited circumstances, you may be able to use special tax rules that could reduce the tax you owe. However, if you separated from service before age 55 and are not yet age 59½, the taxable portion, if not rolled over, may be subject to an additional 10% tax penalty. See pages 4 and 5 of this notice for additional tax information.
You can roll over all or part of the payment by paying it to an IRA or to an Eligible Employer Plan that accepts your rollover within 60 days after you receive the payment. Unless your rollover is to a Roth IRA, the amount rolled over will not be taxed until you take it out of the Traditional IRA or the Eligible Employer Plan.
If you want to roll over 100% of the payment to an IRA or to 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 to a Traditional IRA or Eligible Employer Plan, you will be taxed on the 20% that was withheld and that is not rolled over.

Your right to waive the 30-day notice period. Generally, neither a Direct Rollover nor a payment can be made from TFFR 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 TFFR.

I. Payments that can and cannot be rolled over

Payments from TFFR may be "eligible rollover distributions." This means that they can be rolled over to an IRA or to an Eligible Employer Plan that accepts rollovers. Payments cannot be rolled over to a Roth IRA, a SIMPLE IRA, or a Coverdell Education Savings Account. TFFR will tell you what portion of your payment is an eligible rollover distribution. Generally, a lump sum payment or a periodic distribution paid over a period of less than ten years is considered an "eligible rollover distribution." However, special restrictions apply to after-tax contributions and certain Required Minimum Payments.After-Tax Contributions. If you made after-tax contributions to TFFR, these contributions may be rolled into either an IRA or to certain employer plans that accept rollovers of the after-tax contributions. The following rules apply:

Rollover into an IRA. You can roll over your after-tax contributions to an IRA either directly or indirectly. TFFR will tell you how much of 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 IRS on the applicable forms, the amount of these after-tax contributions. This will enable the nontaxable 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.
Rollover into an Employer Plan. You can roll over after-tax contributions from TFFR to an employer plan qualified under Code section 401(a), a section 403(a) annuity plan, or a section 403(b) tax-sheltered annuity using a Direct Rollover only if the other plan provides separate accounting for amounts rolled over, including separate accounting for the after-tax employee contributions and earnings on those contributions. You cannot roll over after-tax contributions to a governmental 457 plan. 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 TFFR to make a Direct Rollover on your behalf. Also, you cannot first roll over after-tax contributions to a Traditional IRA and then roll over that amount into an employer plan.
Required Minimum Payments. Beginning when you reach age 70½ 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. TFFR will tell you if your payment includes an amount which cannot be rolled over.

II. Direct Rollover

A Direct Rollover is a direct payment of your TFFR benefit 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, except as noted in Section I above. Except for a rollover to a Roth IRA, 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. In addition, no income tax withholding is required for any taxable portion of your benefits for which you choose a Direct Rollover whether you rollover to a Traditional IRA, and Eligible Employer Plan, or a Roth IRA.Direct Rollover to an IRA. You can open an IRA 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 theIRA you choose will allow you to move all or a 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.) If you intend to roll over your distribution to a Roth IRA, also see Publication 590 for what happens if you roll your distribution to a Roth IRA but then fail to meet the requirements to roll to a Roth IRA, which could happen, for example, if your Modified Adjusted Gross Income for the year exceeds $100,000.Direct Rollover to an Eligible Employer Plan. If you are employed by a new employer that has an Eligible Employer Plan, and you want a 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 a Direct Rollover to a Traditional 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.Change in Tax Treatment Resulting From a Direct Rollover. The tax treatment of any payment from the Eligible Employer Plan or Traditional IRA receiving your Direct Rollover might be different than if you received your benefit in a taxable distribution directly from TFFR. 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 entitled "Additional 10% Tax if You Are under Age 59½" and "Special Tax Treatment if You Were Born before January 1, 1936."

III. Payment paid to you

If your payment can be rolled over and the payment is made to you, 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 a Traditional IRA or an Eligible Employer Plan that accepts rollovers. If you do not roll it over, special tax rules may apply.Mandatory Withholding. If any portion of your payment can be rolled over and you do not elect to make a Direct Rollover, TFFR 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 TFFR 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"), you must report the full $10,000 as a taxable payment from TFFR. 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 you are a non-spouse beneficiary and any portion of your payment is taxable but not rolled over, or if you are over age 70½ and the payment includes a required minimum payment, 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, select that option on the election form.Sixty Day Rollover Option. If you receive an eligible rollover distribution, you can still decide to roll over all or part of it 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. If you roll over your distribution to a traditional IRA or Eligible Employer Plan, the portion of your payment that is rolled over will not be taxed until you take it out of the Traditional IRA or the Eligible Employer Plan.You can roll over up to 100% of an eligible rollover distribution, including an amount equal to the 20% of the taxable portion that was withheld. If you choose to roll over 100%, you must find other money within the 60-day period to contribute to the 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.Example: The eligible rollover distribution 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 an IRA or an Eligible Employer Plan. To do this, you roll over the $8,000 you received from TFFR and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, if you have rolled over to a Traditional IRA or an Eligible Employer Plan, 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. Also, the amount of any tax refund depends on the total income taxes you owe for the year on all income and the amount you have withheld during the year on all income.) Of course, if you roll over your distribution to a Roth IRA, whether you roll over 100% or less, the entire distribution (except for any after-tax amount) will be taxable in the year the distribution is made.Additional 10% Tax if You Are Under Age 59½. If you receive a payment before you reach age 59½ 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. If you roll over your distribution, you will not owe this additional 10% tax, whether your rollover is to a Traditional IRA, a Roth IRA, or an Eligible Employer Plan.The additional 10% tax does not apply to a payment if it is (1) paid after you separate from service with your employer during or after the year you reach age 55, (2) paid because you retire due to disability, (3) paid as equal (or almost equal) payments over your life or life expectancy (or your and your beneficiary’s lives or life expectancies), (4) paid directly to the government to satisfy a federal tax levy, (5) 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) certain payments that are paid while you are on active military duty from September 11, 2001 to December 31, 2007, provided you were called to duty for more than 179 days. 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 plan qualified under section 401(a) that can be rolled over and you do not roll it over to an 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 special tax treatment. A lump sum distribution is a payment, within one year, of your entire balance under TFFR that is payable to you after you have reached age 59½ or because you have separated from service with your employer. For a payment to be treated as a lump sum distribution, you must have been a participant in the plan for at least five 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.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 by 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 you were a participant in TFFR before 1974, you may elect to have the part of your payment that is attributable to your pre-1974 participation in TFFR taxed as long-term capital gain at a rate of 20%.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 TFFR from a 403(b) tax-sheltered annuity contract, a governmental 457 plan, or an IRA not originally attributable to a qualified employer plan. If you have previously rolled over a distribution from TFFR, you cannot use this special averaging treatment for later payments from TFFR.If you roll over your payment to a Traditional 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 a Traditional 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. Surviving spouses, alternate payees, and other beneficiaries

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 TFFR 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, 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 an IRA or to an Eligible Employer Plan. Thus, you have the same choices as the employee.If you are a beneficiary other than a surviving spouse or an alternate payee, you can choose a Direct Rollover to an Inherited IRA only, or you may have the benefit paid to you. (An Inherited IRA is a kind of IRA; it can be a Traditional IRA or a Roth IRA. You may not roll over the payment that is made directly to you, nor may you choose to roll over the payment to an Eligible Employer Plan. The Inherited IRA must distribute benefits in accordance with the required minimum distribution rules. In general, distributions from the Inherited IRA must either be paid to you in full within 5 years of the deceased participant’s death or must commence within 12 months of the participant’s death and be paid over your life expectancy. The benefits cannot be rolled over from the Inherited IRA to any other IRA or employer plan.As explained above, surviving spouses and alternate payees have the same choices as the employee. However, unlike surviving spouses and alternate payees, non-spouse beneficiaries do not have the same choices as the employee. Because of this difference, the mandatory withholding rules described in Section III above that typically apply to payments that are not rolled over, do not apply to payments made to non-spouse designated beneficiaries.If you are a surviving spouse, an alternate payee, or another beneficiary, your payment is generally not subject to the additional 10% tax, even if you are younger than age 59½.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 described in Section III. 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 TFFR.

V. Additional Information

This notice summarizes only the federal (not state or local) tax rules that might apply to your payment. The rules described above are complex and contain many conditions and exceptions that are not included in this notice. Therefore, you may want to consult with a professional tax advisor before you take a payment of your benefits from TFFR. Also, you can find more specific information on the tax treatment of payments from qualified employer plans in IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements. These publications are available from your local IRS office, on the IRS’s Internet Web Site at www.irs.gov, or by calling 1-800-TAX-FORMS.1/2008


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