Pension plans are set up and maintained through your job. The company sets up a plan based on strict IRS guidelines and offers the plan to each of its employees. There are many types of plans available. The most commonly used plans are as follows:

A deferred compensation plan is a pension that allows employees to voluntarily contribute an amount (usually up to 15%) of their income per payday to a retirement plan. The contribution is not subject to federal income taxes until the taxpayer withdraws the funds from the plan. All of the distributions from this type of retirement plan are taxable when received. A 401(k) plan is one of the most common types of deferred compensation plans.
Non-contributory plans do not allow any contributions by the employee. An example is the Military Retirement Plan. The employer and employee enter into a contract requiring a specified number of years of employment in exchange for a specific amount of monthly retirement once the employee fulfills their obligation. All of the distributions from this type of retirement plan are taxable when received.
An annuity is a pension plan that requires employees to pay for a future retirement benefit. An example of this type of plan is a Civil Service pension. The payment is deducted from an employee's paycheck every payday after taxes are deducted. A portion of each distribution is not taxed.
Credit for Contributions to Employer Plan or IRAs
The Retirement Savings Contributions Credit is a percentage (50%, 20%, or 10%) of up to $2,000 of contributions to an employer elective deferral plan or IRA. No credit is allowed on: Married Filing Jointly returns with a modified adjusted gross income over $50,000, Head of Household returns over $37,500, and Single, Qualifying Widow(er) or Married Filing Separately returns over $25,000. You must be age 18 or older to claim the credit. In addition, you cannot be a student as defined in the dependency tests or claimed as a dependent on another's return. A distribution from a retirement plan any time in the preceding two tax years or the current tax year reduces the amount available for the credit. This credit is in addition to any deduction or exclusion for the contribution.

Distributions from Retirement Plans
You can transfer funds from your qualified retirement plan to an IRA or other qualified plan within 60 days without paying any income tax. The opportunity to roll over pension plan funds into alternate plans or an IRA is an ideal way for an employee who leaves their job to avoid the tax liability assessed when the plan is terminated and a check is issued. The rollover is a tax benefit that eliminates the payment of taxes on a distribution made for any reason other than a regular retirement distribution. Retirement plan administrators/trustees are required by law to permit a transfer of funds from their retirement plan directly to another qualified plan. This is known as a "trustee-to-trustee" transfer. The law prefers the "trustee-to-trustee" transfer and discourages "hand check" distributions by requiring plans to withhold 20% of the distribution before a check is issued. Therefore, you will receive a check for only 80% of the transfer amount. This can be a "tax trap" for a taxpayer that does not have the funds available equal to the amount withheld. The taxpayer needs to replace the 20% from other sources as part of the rollover within the 60-day period or the 20% will be considered to have been distributed and subject to taxes.

The IRS may waive the 60-day requirement for rollovers from pensions if you have suffered from a casualty, disaster, or other event beyond your reasonable control that prevents you from meeting the 60-day rule.

If you receive money from the plan before reaching age 59½, you will be subject to a 10% additional tax unless you meet one of the exceptions. Some exceptions to the additional tax are:

Distributions made to a taxpayer as a part of a series of substantially equal periodic payments for life beginning after separation from service
Distributions made because the taxpayer is permanently and totally disabled.
Distributions to a beneficiary of a deceased taxpayer.
Distributions because a taxpayer is 55 or older and retired or separated from service.
Distributions required by the courts in a divorce settlement.
Distributions used to pay deductible medical expenses (expenses greater than 7.5% of AGI) whether or not the taxpayer itemizes.
Distributions from an ESOP for dividends on employer securities held by the plan.
Distributions due to an IRS levy of the plan.

Tax laws can be confusing, or just overwhelming. Let the tax professionals at Emerald Tax Service help you get every dollar you deserve.