Net Investment Income Tax (NIIT).

Annuities under a nonqualified plan are included in calculating your net investment income for the NIIT. See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information.

Withdrawals.

If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan.

If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. To the extent the amount withdrawn doesn't exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part).

If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable.

The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you haven't previously recovered tax free. The rest is taxable.

For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments, later. If you withdraw funds from your annuity before you reach age 59½, also see Tax on Early Distributions under Special Additional Taxes, later.

Annuity payments.

If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments, later. For a variable annuity paid under a qualified plan, you must generally use the Simplified Method. For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. For more information, see Variable annuities under Computation Under the General Rule in Pub. 939.

Death benefits.

If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. If you choose to receive an annuity, the payments are subject to tax as described above. If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. See Survivors and Beneficiaries, later.

Is your plan eligible?

To find out if your plan is an eligible plan, check with your employer. Plans that aren’t eligible section 457 plans include the following.

Military and government disability pensions.

Certain military and government disability pensions aren’t taxable.

Service-connected disability.

You may be able to exclude from income amounts you receive as a pension, annuity, or similar allowance for personal injury or sickness resulting from active service in one of the following government services.

Nonresident aliens.

A nonresident alien is an individual who isn't a citizen or a resident alien of the United States. If you are a nonresident alien, you are subject to U.S. tax on your SSEB portion of tier 1 benefits at a 30% rate, unless exempt or subject to a lower treaty rate. See Pub. 519, U.S. Tax Guide for Aliens, for more information.

If your rate of tax changed or your country of legal residence changed during the tax year, you may receive more than one Form RRB-1042S or RRB-1099-R. To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all forms you received for that year.

Tax withholding.

To request or change your income tax withholding from SSEB payments, U.S. citizens should contact the IRS for Form W-4V, Voluntary Withholding Request, and file it with the RRB. To elect, revoke, or change your income tax withholding from NSSEB, tier 2, VDB, and supplemental annuity payments received, use Form RRB W-4P, Withholding Certificate for Railroad Retirement Payments. If you are a nonresident alien or a U.S. citizen living abroad, you should provide Form RRB-1001, Nonresident Questionnaire, to the RRB to furnish citizenship and residency information and to claim any treaty exemption from U.S. tax withholding. Nonresident U.S. citizens can't elect to be exempt from withholding on payments delivered outside the United States.

Help from the RRB.

To request an RRB form or to get help with questions about an RRB benefit, you should contact your nearest RRB field office if you reside in the United States (call 877-772-5772 for the nearest field office) or U.S. Consulate/Embassy if you reside outside the United States. You can visit the RRB on the Internet at RRB.gov.

Form RRB-1099-R.

The following discussion explains the items shown on Form RRB-1099-R. The amounts shown on this form are before any deduction for:

The amounts shown on this form are after any offset for:

The amounts shown on Form RRB-1099-R don't reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. To determine if any of these rules apply to your benefits, see the discussions about them later.

Generally, amounts shown on your Form RRB-1099-R are considered a normal distribution. Use distribution code “7” if you are asked for a distribution code. Distribution codes aren't shown on Form RRB-1099-R.

There are three copies of this form. Copy B is to be included with your income tax return if federal income tax is withheld. Copy C is for your own records. Copy 2 is filed with your state, city, or local income tax return when required. See the illustrated Copy B (Form RRB-1099-R), later.

.Each beneficiary will receive their own Form RRB-1099-R. If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. So that you get your form timely, make sure the RRB always has your current mailing address..

Box 1—Claim Number and Payee Code.

Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. This is the number under which the RRB paid your benefits. Your payee code follows your claim number and is the last number in this box. It is used by the RRB to identify you under your claim number. In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box.

Box 2—Recipient's Identification Number.

This is the recipient's U.S. taxpayer identification number (TIN). It is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient.

Box 3—Employee Contributions.

This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. This amount is the employee's cost that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later.) The amount shown is the total employee contribution amount, not reduced by any amounts that the RRB calculated as previously recovered. It is the latest amount reported for 2023 and may have increased or decreased from a previous Form RRB-1099-R. If this amount has changed, the change is retroactive. You may need to refigure the tax-free part of your NSSEB/tier 2 benefit for 2023 and prior tax years. If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable.

.If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contribution amount..

Box 4—Contributory Amount Paid.

This is the gross amount of the NSSEB and tier 2 benefit you received in 2023, less any 2023 benefits you repaid in 2023. (Any benefits you repaid in 2023 for an earlier year or for an unknown year are shown in box 8.) This amount is the total contributory pension paid in 2023. It may be partly taxable and partly tax free or fully taxable. If you determine you are eligible to compute a tax-free part, as explained later in Partly Taxable Payments under Taxation of Periodic Payments, use the latest reported employee contribution amount shown in box 3 as the cost.

Box 5—Vested Dual Benefit.

This is the gross amount of VDB payments paid in 2023, less any 2023 VDB payments you repaid in 2023. It is fully taxable. VDB payments you repaid in 2023 for an earlier year or for an unknown year are shown in box 8.

Box 6—Supplemental Annuity.

This is the gross amount of supplemental annuity benefits paid in 2023, less any 2023 supplemental annuity benefits you repaid in 2022. It is fully taxable. Supplemental annuity benefits you repaid in 2023 for an earlier year or for an unknown year are shown in box 8.

Box 7—Total Gross Paid.

This is the sum of boxes 4, 5, and 6. The amount represents the total pension paid in 2023. Include this amount on Form 1040, 1040-SR, or 1040-NR, line 5a.

Box 8—Repayments.

This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2023 for years before 2023 or for unknown years. The amount shown in this box hasn't been deducted from the amounts shown in boxes 4, 5, and 6. It only includes repayments of benefits that were taxable to you. This means it only includes repayments in 2023 of NSSEB paid after 1985, tier 2 benefits and VDB paid after 1983, and supplemental annuity benefits paid in any year. If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. For more information about repayments, see Repayment of benefits received in an earlier year, later.

.You may have repaid an overpayment of benefits by returning a payment, by making a payment, or by having an amount withheld from your railroad retirement annuity payment..

Box 9—Federal Income Tax Withheld.

This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Include this on your income tax return as tax withheld. If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2023, you will receive more than one Form RRB-1099-R for 2023. Determine the total amount of U.S. federal income tax withheld from your 2023 RRB NSSEB, tier 2, VDB, and supplemental annuity payments by adding the amounts in box 9 of all original 2023 Forms RRB-1099-R, or the latest corrected or duplicate Forms RRB-1099-R you receive.

Box 10—Rate of Tax.

If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2023. If you are a nonresident alien whose tax was withheld at more than one rate during 2023, you will receive a separate Form RRB-1099-R for each rate change during 2023. If you are taxed as a U.S. citizen or resident alien, this box doesn't apply to you.

Box 11—Country.

If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2023. If you are a nonresident alien who was a resident of more than one country during 2023, you will receive a separate Form RRB-1099-R for each country of residence during 2023. If you are taxed as a U.S. citizen or resident alien, this box doesn't apply to you.

Box 12—Medicare Premium Total.

This is for information purposes only. The amount shown in this box represents the total amount of Medicare Part B premiums deducted from your railroad retirement annuity payments in 2023. Medicare premium refunds aren't included in the Medicare total. The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident alien of the United States) or Form RRB-1042S (if you are a nonresident alien). However, if Form RRB-1099 or Form RRB-1042S isn't required for 2023, then this total will be shown on Form RRB-1099-R. If your Medicare premiums were deducted from your social security benefits, paid by a third party, refunded to you, and/or you paid the premiums by direct billing, your Medicare total won't be shown in this box.

Repayment of benefits received in an earlier year.

If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it.

However, if you repaid $3,000, or less, for tax years 2018 through 2025, miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit are suspended and therefore not deductible on Schedule A (Form 1040).

If you repaid more than $3,000 in 2023, you can either take a deduction for the amount repaid on Schedule A (Form 1040), line 16, or you can take a credit against your tax. For more information, see Repayments in Pub. 525.

Choosing no withholding.

You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. You can make this choice on Form W-4P for periodic payments or Form W-4R for nonperiodic payments. This choice generally remains in effect until you revoke it.

The payer will ignore your choice not to have tax withheld if:

To choose not to have tax withheld, a U.S. citizen or resident alien must give the payer a home address in the United States or its territories. Without that address, the payer must withhold tax. For example, the payer has to withhold tax if the recipient has provided a U.S. address for a nominee, trustee, or agent to whom the benefits are delivered, but hasn't provided their own U.S. home address.

If you don't give the payer a home address in the United States or its territories, you can choose not to have tax withheld only if you certify to the payer that you aren't a U.S. citizen, a U.S. resident alien, or someone who is subject to section 877 because you expatriated before June 17, 2008. See Form 8854 and its instructions for details about section 877. But, if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. This 30% rate won't apply if you are exempt or subject to a reduced rate by treaty. For details, see Pub. 519.

Periodic payments.

Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated as wages for withholding purposes. Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than 1 year (such as for 15 years or for life). You should give the payer a completed withholding certificate (Form W-4P or a similar form provided by the payer). If you don't, tax will be withheld as if you were single with no adjustments made in Steps 2 through 4 on Form W-4P.

Tax will be withheld as if you were single with no adjustments made in Steps 2 through 4 on Form W-4P if:

You must file a new withholding certificate to change the amount of withholding. See the instructions for Form W-P and Periodic Payments in Pub. 505 for more information.

Nonperiodic distributions.

Unless you choose no withholding, the withholding rate for a nonperiodic distribution (a payment other than a periodic payment) that isn't an eligible rollover distribution is 10% of the distribution. You can also ask the payer to withhold an additional amount using Form W-4R. The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule.

Eligible rollover distribution.

If you receive an eligible rollover distribution, 20% of it will generally be withheld for income tax. You can't choose not to have tax withheld from an eligible rollover distribution. However, tax won't be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. For more information about eligible rollover distributions, see Rollovers, later.

Estimated tax.

Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Generally, you must make estimated tax payments for 2024 if you expect to owe at least $1,000 in tax (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of:

Deductible voluntary employee contributions.

Distributions you receive that are based on your accumulated deductible voluntary employee contributions are generally fully taxable in the year distributed to you. Accumulated deductible voluntary employee contributions include net earnings on the contributions. If distributed as part of a lump sum, they don't qualify for the 10-year tax option or capital gain treatment, explained later.

Qualified plan annuity starting before November 19, 1996.

If your annuity is paid under a qualified plan and your annuity starting date (defined earlier under Cost (Investment in the Contract)) is after July 1, 1986, and before November 19, 1996, you could have chosen to use either the Simplified Method or the General Rule. If your annuity starting date is before July 2, 1986, you use the General Rule unless your annuity qualified for the 3-year Rule. If you used the 3-year Rule (which was repealed for annuities starting after July 1, 1986), your annuity payments are generally now fully taxable.

Exclusion limit.

Your annuity starting date determines the total amount of annuity payments that you can exclude from income over the years. Once your annuity starting date is determined, it doesn't change. If you calculate the taxable portion of your annuity payments using the Simplified Method Worksheet, the annuity starting date determines the recovery period for your cost. That recovery period begins on your annuity starting date and isn't affected by the date you first complete the worksheet.

Exclusion limited to cost.

If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a recovery of the cost can't exceed your total cost. Any unrecovered cost at your (or the last annuitant's) death is allowed as an itemized deduction on the final return of the decedent.

Exclusion not limited to cost.

If your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost.

Annuity starting date.

The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later.

Distributions of employer securities.

If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. The NUA is the net increase in the securities' value while they were in the trust. This tax deferral applies to distributions of the employer corporation's stocks, bonds, registered debentures, and debentures with interest coupons attached.

If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution.

A lump-sum distribution for this purpose is the distribution or payment of a plan participant's entire balance (within a single tax year) from all of the employer's qualified plans of one kind (pension, profit-sharing, or stock bonus plans), but only if paid:

.If you choose to include NUA in your income for the year of the distribution and the participant was born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods described under Lump-Sum Distributions, later..

If the distribution isn't a lump-sum distribution, tax is deferred only on the NUA resulting from employee contributions other than deductible voluntary employee contributions.

The NUA on which tax is deferred should be shown in box 6 of the Form 1099-R you receive from the payer of the distribution.

When you sell or exchange employer securities with tax-deferred NUA, any gain is long-term capital gain up to the amount of the NUA that isn’t included in your basis in the employer securities. Any gain that is more than the NUA is long-term or short-term gain, depending on how long you held the securities after the distribution.

Your basis in the employer securities is the total of the following amounts.

How to report.

Enter the total amount of a nonperiodic distribution on Form 1040, 1040-SR, or 1040-NR, line 5a. Enter the taxable amount of the distribution on Form 1040, 1040-SR, or 1040-NR, line 5b. However, if you make a tax-free rollover or elect an optional method of figuring the tax on a lump-sum distribution, see How to report in the discussions of those tax treatments, later.

Exception for qualified plan, 403(b) plan, and governmental plan loans.

At least part of certain loans under a qualified employee plan, qualified employee annuity, tax-sheltered annuity (403(b) plan), or governmental plan isn't treated as a distribution from the plan. This exception to the loan-as-distribution rule applies only to a loan that either:

If a loan qualifies for this exception, you must treat it as a nonperiodic distribution only to the extent that the loan, when added to the outstanding balances of all your loans from all plans of your employer (and certain related employers, defined later), exceeds the lesser of:

You must reduce the $50,000 amount if you already had an outstanding loan from the plan during the 1-year period ending the day before you took out the loan. The amount of the reduction is your highest outstanding loan balance during that period minus the outstanding balance on the date you took out the new loan. If this amount is zero or less, ignore it.

Substantially level payments.

To qualify for the exception to the loan-as-distribution rule, the loan must require substantially level payments at least quarterly over the life of the loan. If the loan is from a designated Roth account, the payments must be satisfied separately for that part of the loan and for the part of the loan from other accounts under the plan. This level payment requirement doesn't apply to the period in which you are on a leave of absence without pay or with a rate of pay that is less than the required installment. Generally, this leave of absence must not be longer than 1 year. You must repay the loan within 5 years from the date of the loan (unless the loan was used to acquire your main home). Your installment payments after the leave ends must not be less than your original payments.

However, if your plan suspends your loan payments for any part of the period during which you are in the uniformed services, you won't be treated as having received a distribution even if the suspension is for more than 1 year and the term of the loan is extended. The loan payments must resume upon completion of such period and the loan must be repaid in substantially level installments within 5 years from the date of the loan (unless the loan was used to acquire your main home) plus the period of suspension.

Related employers and related plans.

In determining loan balances for purposes of applying the exception to the loan-as-distribution rule, you must add the balances of all your loans from all plans of your employer and from all plans of your employers who are treated as a single employer. Treat separate employers' plans as plans of a single employer if they are treated that way under other qualified retirement plan rules because the employers are related.

Employers are related if they are:

An affiliated service group is generally two or more service organizations whose relationship involves an ownership connection. Their relationship also includes the regular or significant performance of services by one organization for or in association with another.

Denial of interest deduction.

If the loan from a qualified plan isn't treated as a distribution because the exception applies, you can't deduct any of the interest on the loan during any period that:

Reporting by plan.

If your loan is treated as a distribution (deemed distribution), you should receive a Form 1099-R showing code “L” in box 7. If your loan is treated as a qualified plan loan offset, you should receive a Form 1099-R showing code “M” in box 7. If your loan is not a qualified plan loan offset, no code will be reported on Form 1099-R for the offset.

Effect on investment in the contract.

If your loan is treated as a distribution, you must reduce your investment in the contract to the extent that the distribution is tax free under the allocation rules for qualified plans, explained earlier. Repayments of the loan increase your investment in the contract to the extent that the distribution is taxable under those rules.

If you receive a loan under a nonqualified plan other than a 403(b) plan, including a commercial annuity contract that you purchase directly from the issuer, you increase your investment in the contract to the extent that the distribution is taxable under the general allocation rule for nonqualified plans, explained earlier. Repayments of the loan don't affect your investment in the contract. However, if the distribution is excepted from the general allocation rule (for example, because it is made under a contract entered into before August 14, 1982), you reduce your investment in the contract to the extent that the distribution is tax free and increase it for loan repayments to the extent that the distribution is taxable.

Tax-free exchange.

No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same. However, if an annuity contract is exchanged for a life insurance or endowment contract, any gain due to interest accumulated on the contract is ordinary income.

Tax-free transfers for certain cash distributions.

If you receive cash from the surrender of one contract and invest the cash in another contract, you generally don't have a tax-free transfer. However, you can elect to receive tax-free treatment for a cash distribution from an insurance company that is subject to a rehabilitation, conservatorship, insolvency, or similar state proceeding if all of the following conditions are met.

You must give the new issuer a statement containing the following information.

You must also attach the following items to your timely filed income tax return for the year of the initial distribution.

Tax-free exchange reported on Form 1099-R.

If you make a tax-free exchange of an annuity contract for another annuity contract issued by a different company, the exchange will be shown on Form 1099-R with code “6” in box 7. You need not report this on your tax return.

Date of purchase of contract received in a tax-free exchange.

If you acquire an annuity contract in a tax-free exchange for another annuity contract, its date of purchase is the date you purchased the annuity you exchanged. This rule applies for determining if the annuity qualifies for exemption from the tax on early distributions as an immediate annuity. See Tax on Early Distributions, later.

Alternate payee under qualified domestic relations order.

If you receive a distribution as an alternate payee under a qualified domestic relations order (discussed earlier under General Information), you may be able to choose the optional tax computations for it. You can make this choice for a distribution that would be treated as a lump-sum distribution had it been received by your spouse or former spouse (the plan participant). However, for this purpose, the balance to your credit doesn't include any amount payable to the plan participant.

If you choose an optional tax computation for a distribution received as an alternate payee, this choice won't affect any election for distributions from your own plan.

More than one recipient.

One or all of the recipients of a lump-sum distribution can use the optional tax computations. See Multiple recipients of a lump-sum distribution in the instructions for Form 4972.

Reemployment.

A separated employee's vested percentage in their retirement benefit may increase if they are rehired by the employer within 5 years following separation from service. This possibility doesn't prevent a distribution made before reemployment from qualifying as a lump-sum distribution. However, if the employee elected an optional method of figuring the tax on the distribution and their vested percentage in the previous retirement benefit increases after reemployment, the employee must recapture the tax saved. This is done by increasing the tax for the year in which the increase in vesting first occurs.

Distributions that don't qualify.

The following distributions don't qualify as lump-sum distributions for the capital gain treatment or 10-year tax option.

How to treat the distribution.

If you receive a lump-sum distribution, you may have the following options for how to treat the taxable part.

The first three options are explained in the following discussions.

Electing optional lump-sum treatment.

You can choose to use the 10-year tax option or capital gain treatment only once after 1986 for any plan participant. If you make this choice, you can't use either of these optional treatments for any future distributions for the participant.

Complete Form 4972 and attach it to your Form 1040 or 1040-SR if you choose to use one or both of the tax options. If you received more than one lump-sum distribution for a plan participant during the year, you must add them together in your computation. If you and your spouse are filing a joint return and you both have received a lump-sum distribution, each of you should complete a separate Form 4972.

Time for choosing.

You must decide to use the tax options before the end of the time, including extensions, for making a claim for credit or refund of tax. This is usually 3 years after the date the return was filed or 2 years after the date the tax was paid, whichever is later. (Returns filed before their due dates are considered filed on their due dates.)

Changing your mind.

You can change your mind and decide not to use the tax options within the time period just discussed. If you change your mind, file Form 1040-X, Amended U.S. Individual Income Tax Return, with a statement saying you don't want to use the optional lump-sum treatment. Generally, you must pay any additional tax due to the change with the Form 1040-X.

How to report.

If you elect capital gain treatment (but not the 10-year tax option) for a lump-sum distribution, include the ordinary income part of the distribution on Form 1040, 1040-SR, or 1040-NR, lines 5a and 5b. Enter the capital gain part of the distribution in Part II of Form 4972. Include the tax from Form 4972, line 7, in the total on Form 1040, 1040-SR, or 1040-NR, line 16.

If you elect the 10-year tax option, don't include any part of the distribution on Form 1040, 1040-SR, or 1040-NR, lines 5a and 5b. Report the entire distribution in Part III of Form 4972 or, if you also elect capital gain treatment, report the capital gain part in Part II and the ordinary income part in Part III. Include the tax from Form 4972, line 30, in the total on Form 1040, 1040-SR, or 1040-NR, line 16.

Taxable and tax-free parts of the distribution.

The taxable part of a lump-sum distribution is the employer's contributions and income earned on your account. You may recover your cost in the lump sum and any NUA in employer securities tax free.

Cost.

In general, your cost is the total of:

Net unrealized appreciation (NUA).

The NUA in employer securities (box 6 of Form 1099-R) received as part of a lump-sum distribution is generally tax free until you sell or exchange the securities. (See Distributions of employer securities under Figuring the Taxable Amount, earlier.) However, if you choose to include the NUA in your income for the year of the distribution and there is an amount in box 3 of Form 1099-R, part of the NUA will qualify for capital gain treatment. Use the NUA Worksheet in the Instructions for Form 4972 to find the part that qualifies.

Losses.

You may be able to claim a loss on your return if you receive a lump-sum distribution that is less than the plan participant's cost. You must receive the distribution entirely in cash or worthless securities. The amount you can claim is the difference between the participant's cost and the amount of the cash distribution, if any.

However, for tax years 2018 through 2025, miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit are suspended and therefore not deductible on Schedule A (Form 1040).

5% rate on certain early distributions from deferred annuity contracts.

If an early withdrawal from a deferred annuity is otherwise subject to the 10% additional tax, a 5% rate may apply instead. A 5% rate applies to distributions under a written election providing a specific schedule for the distribution of your interest in the contract if, as of March 1, 1986, you had begun receiving payments under the election. On line 4 of Form 5329, multiply the line 3 amount by 5% instead of 10%. Attach an explanation to your return.

Distributions from designated Roth accounts allocable to in-plan Roth rollovers within the 5-year period.

If, within the 5-year period starting with the first day of your tax year in which you rolled over an amount from your 401(k), 403(b), or 457(b) plan to a designated Roth account, you take a distribution from the designated Roth account, you may have to pay the additional 10% tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the in-plan Roth rollover that you had to include in income (recapture amount). A separate 5-year period applies to each in-plan Roth rollover. See Figuring your recapture amount, later, to determine the recapture amount, if any.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution allocable to an in-plan Roth rollover is separately determined for each in-plan Roth rollover, and isn't necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution.

Figuring your recapture amount.

For any early distribution in 2023 from your designated Roth account that is allocable to an in-plan Roth rollover, you allocate the amount from box 10 of your 2023 Form 1099-R to the amounts, if any, you have rolled over into that designated Roth account.

If you haven’t taken a distribution from your designated Roth account before 2023, then allocate the amount in box 10 of your 2023 Form 1099-R to the amounts you reported on the lines listed in the Recapture Allocation Chart (filling in the Taxable column first, and then the Nontaxable column for each year) until you have covered the entire amount in box 10.

If you have taken a distribution from your designated Roth account prior to 2023, then allocate the amount in box 10 of your 2023 Form 1099-R to the amounts you reported on the lines listed in the Recapture Allocation Chart (filling in the Taxable column first, and then the Nontaxable column for each year). However, don't start at the beginning; instead, begin with the first line that hasn’t been used fully for a previous distribution.

Your recapture amount is the sum of the amounts you allocated for 2011 through 2023 under the Taxable column in the Recapture Allocation Chart. You will also include this amount on Form 5329, line 1.

Exceptions to tax.

Certain early distributions are excepted from the early distribution tax. If the payer knows that an exception applies to your early distribution, distribution code “2,” “3,” or “4” should be shown in box 7 of your Form 1099-R and you don't have to report the distribution on Form 5329. If an exception applies but distribution code “1” (early distribution, no known exception) is shown in box 7, you must file Form 5329. Enter the taxable amount of the distribution shown in box 2a of your Form 1099-R on line 1 of Form 5329. On line 2, enter the amount that can be excluded and the exception number shown in the Form 5329 instructions.

.If distribution code “1” is incorrectly shown on your Form 1099-R for a distribution received when you were age 59½ or older, include that distribution on Form 5329. Enter exception number “12” on line 2. .

General exceptions.

The tax doesn’t apply to distributions that are:

Disabled.

You are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or be of a long, continued, or indefinite duration.

Distributions to terminally ill individuals.

You may be able to take a distribution from a qualified retirement plan before reaching age 59½ and not have to pay the 10% additional tax on early distributions if you receive the distribution on or after the date you have received a certification by a physician that you are terminally ill.

Terminally ill individual.

You are considered terminally ill if you are certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 84 months or less after the date of the certification.

Certification of terminal illness.

A certification of terminal illness must include the following:

However, it is not sufficient evidence for an employee who is a physician to certify the physician’s own terminal illness.

Amount may be repaid.

You may repay an amount you received because you are certified terminally ill by making one or more contributions to the plan as long as the total of those contributions doesn’t exceed the amount distributed to you as a terminally ill individual.

Additional exceptions for qualified retirement plans.

The 10% additional tax doesn’t apply to distributions that are:

Separation from service.

In order to meet the requirements for the first two exceptions in the list above, you must have separated from service in or after the year in which you reach age 55 (or the earlier of age 50 or with 25 years of service under the plan, whichever is earlier, for qualified public safety employees and private sector firefighters).

You can’t separate from service before that year. Wait until you reach the applicable age, described above, and take a distribution.

Qualified public safety employees.

If you are a qualified public safety employee, distributions that are made from a governmental retirement plan may not be subject to the 10% additional tax on early distributions. See Certain distributions to qualified public safety employees, later.

You are a qualified public safety employee if you provided police protection, firefighting services, or emergency medical services for a state or municipality.

For tax years beginning after 2015, the definition of qualified public safety employees is expanded to include:

Certain distributions to qualified public safety employees.

The exception to the 10% additional tax for early distributions applies to distributions made to qualified public safety employees and firefighters covered by private sector retirement plans after separation from service on or after they reach age 50 or with 25 years of service under the plan, whichever is earlier. The exception also includes distributions to those employees who meet the age or years of service requirement, as described earlier, who provide services as a corrections officer or as a forensic security employee providing for the care, custody, and control of forensic patients.

Qualified reservist distributions.

A qualified reservist distribution isn’t subject to the additional tax on early distributions. A qualified reservist distribution is a distribution (a) from elective deferrals under a section 401(k) or 403(b) plan, or a similar arrangement; (b) to an individual ordered or called to active duty (because they are a member of a reserve component) for a period of more than 179 days or for an indefinite period; and (c) made during the period beginning on the date of the order or call and ending at the close of the active duty period. You must be ordered or called to active duty after September 11, 2001.

.You can choose to recontribute part or all of the distributions to an IRA. These additional contributions must be made within 2 years after your active-duty period ends. Any amount recontributed must be reported on Form 8606 as a nondeductible contribution. You can’t take a deduction for these contributions. However, the normal dollar limitations for contributions to IRAs don't apply to these special contributions, and you can make regular contributions to your IRA, up to the amount otherwise allowable..

Qualified birth or adoption distributions.

A qualified birth or adoption distribution isn't subject to the additional tax on early distributions. An individual can receive up to $5,000 from an applicable eligible retirement plan for a distribution made during the 1-year period beginning on the date on which a child of the individual is born or the date on which the legal adoption by the individual of an eligible adoptee is finalized. For more information on qualified birth or adoption distributions, see Notice 2020-68, which is on page 567 of Internal Revenue Bulletin 2020-38 at IRS.gov/pub/irs-irb20-38.pdf.

Repayment of qualified birth or adoption distributions limited to 3 years.

If you received a qualified birth or adoption distribution after December 29, 2022, you may repay the distribution by making one or more contributions to a qualified plan during the 3-year period beginning on the day after the date on which the distribution was received. For distributions received on or before December 29, 2022, you may repay the distribution during the period that begins after the distribution was received and ending on the date before January 1, 2026.

Additional exceptions for nonqualified annuity contracts.

The tax doesn’t apply to distributions that are:

Substantially equal periodic payments.

Payments are substantially equal periodic payments if they are made in accordance with one of the following methods.

.A change from method (2) or (3) to method (1) isn’t treated as a modification to which the recapture tax (discussed next) applies..

Recapture tax for changes in distribution method under equal payment exception.

An early distribution recapture tax may apply if, before you reach age 59½, the distribution method under the equal periodic payment exception changes (for reasons other than your death or disability). The tax applies if the method changes from the method requiring equal payments to a method that wouldn’t have qualified for the exception to the tax. The recapture tax applies to the first tax year to which the change applies. The amount of tax is the amount that would have been imposed had the exception not applied, plus interest for the deferral period.

The recapture tax also applies after you reach age 59½ if your payments under a distribution method that qualifies for the exception are modified within 5 years of the date of the first payment. In that case, the tax applies only to payments distributed before you reach age 59½.

Report the recapture tax and interest on line 4 of Form 5329. Attach an explanation to the form. Don’t enter the explanation next to the line or enter any amount for the recapture on line 1 or 3 of the form.

Reduced tax rate for excess accumulations.

The additional tax rate for distributions that are less than the RMD amount (excess accumulations) is reduced to 25% for tax years beginning in 2023 and after.

You may be subject to a reduced additional tax rate of 10% of the amount not distributed if, during the correction window, you take a distribution of the amount on which the tax is due and submit a tax return reflecting this additional tax.

The “correction window” is the period of time beginning on the date on which the additional tax is imposed on the distribution shortfall and ends on the earliest of:

Waiver.

The tax may be waived if you establish that the shortfall in distributions was due to reasonable error and that reasonable steps are being taken to remedy the shortfall. If you believe you qualify for this relief, you must file Form 5329. Enter “RC” and the amount you want waived in parentheses on the dotted line next to line 54, and attach a letter of explanation. Subtract this amount from the total shortfall you figured without regard to the waiver and enter the result on line 54.

State insurer delinquency proceedings.

You might not receive the minimum distribution because assets are invested in a contract issued by an insurance company in state insurer delinquency proceedings. If your payments are reduced below the minimum because of these proceedings, you should contact your plan administrator. Under certain conditions, you won’t have to pay the 50% tax.

Required beginning date.

Unless the rule for 5% owners applies, you must generally begin to receive distributions from your qualified retirement plan by April 1 of the year that follows the later of:

5% owners.

If you are a 5% owner, you must begin to receive distributions from the plan by April 1 of the year that follows the calendar year in which you reach age 73. This rule doesn’t apply if your retirement plan is a governmental or church plan.

You are a 5% owner if, for the plan year ending in the calendar year in which you reach age 73, you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the outstanding stock (or more than 5% of the total voting power of all stock) of the employer, or more than 5% of the capital or profits interest in the employer.

Required distributions.

By the required beginning date, you must either:

After the starting year for periodic distributions, you must receive at least the RMD for each year by December 31 of that year. (The starting year is the year in which you reach age 73 or retire, whichever applies in determining your required beginning date.) If no distribution is made in your starting year, the RMDs for 2 years must be made the following year (one by April 1 and one by December 31).

Distributions after the employee's death.

If the employee was receiving periodic distributions before their death and the employee dies after the required beginning date, any payments not made as of the time of death must generally be distributed at least as rapidly as under the distribution method being used at the date of death.

In addition, if distributions are being made from a defined contribution plan and the employee's beneficiary is not an eligible designated beneficiary, any payments not made as of the time of death must be distributed within 10 years after the death of the employee. An eligible designated beneficiary is the employee's spouse, the employee's child who has not reached majority, a disabled individual, a chronically ill individual, or an individual not more than 10 years younger than the employee.

If the employee dies before the required beginning date, the entire account must be distributed under one of the following rules.

The terms of the plan may determine which of these three rules applies. If the plan permits the employee or the eligible designated beneficiary to choose the rule that applies, this choice must be made by the earliest date a distribution would be required under either of the rules. Generally, this date is December 31 of the year following the year of the employee's death.

If the employee or the eligible designated beneficiary didn’t choose a rule and the plan doesn’t specify the rule that applies, distribution must be made under Rule 3 if the employee has an eligible designated beneficiary (or in the case of a defined benefit plan, an individual was designated as the beneficiary under the plan) or under Rule 2 if the employee was a participant in a defined contribution plan, and has designated an individual as the beneficiary under the plan, but that individual isn't an eligible designated beneficiary. If an employee doesn't have a designated beneficiary, distribution must be made under Rule 1.

Distributions under Rule 3 must generally begin by December 31 of the year following the year of the employee's death. However, if the surviving spouse is the beneficiary, distributions need not begin until December 31 of the year the employee would have reached age 73, if later.

If the surviving spouse is the designated beneficiary and distributions are to be made under Rule 3, a special rule applies if the spouse dies after the employee but before distributions are required to begin. In this case, distributions may be made to the spouse's beneficiary under either Rule 1, Rule 2, or Rule 3 as though the beneficiary were the employee's beneficiary and the employee died on the spouse's date of death. However, if the surviving spouse remarries after the employee's death and the new spouse is designated as the spouse's beneficiary, this special rule applicable to surviving spouses doesn’t apply to the new spouse.

If distributions from a defined contribution plan began under Rule 3 and the eligible designated beneficiary dies or a beneficiary who is a minor child reaches majority, distributions must be completed by December 31 of the 10th year following the year of the beneficiary's death or the child reaching majority.

Minimum distributions from an annuity plan.

Special rules may apply if you receive distributions from your retirement plan in the form of an annuity. Your plan administrator should be able to give you information about these rules.

Minimum distributions from an individual account plan.

Your plan administrator should be able to give you information about how the amount of your RMD was figured.

If there is an account balance to be distributed from your plan (not as an annuity), your plan administrator must figure the minimum amount that must be distributed from the plan each year.

What types of installments are allowed?

The minimum amount that must be distributed for any year may be made in a series of installments (for example, monthly or quarterly) as long as the total payments for the year made by the date required aren’t less than the minimum amount required for the year.

More than minimum.

Your plan can distribute more in any year than the minimum amount required for that year; but if it does, you won’t receive credit for the additional amount in determining the minimum amount required for future years. However, any amount distributed in your starting year will be credited toward the amount required to be distributed by April 1 of the following year.

Combining multiple accounts to satisfy the minimum distribution requirements.

Generally, the RMD must be figured separately for each account. Each qualified employee retirement plan and qualified annuity plan must be considered individually in satisfying its distribution requirements. However, if you have more than one tax-sheltered annuity account, you can total the RMDs and then satisfy the requirement by taking distributions from any one (or more) of the tax-sheltered annuities.

Main home (principal place of abode).

Generally, your main home is the home where you live most of the time. A temporary absence due to special circumstances, such as illness, education, business, military service, evacuation, or vacation, won’t change your main home.

Qualified disaster.

A qualified disaster means any major disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act after December 27, 2020.

Qualified disaster area.

A qualified disaster area means any area with respect to which the major disaster was declared under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. This term does not include any area which is a qualified disaster area solely by reason of section 301 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Incident period.

The incident period for any qualified disaster is the period specified by the Federal Emergency Management Agency (FEMA) as the period during which the disaster occurred.

Qualified disaster recovery distribution.

A qualified disaster recovery distribution is any distribution:

Economic loss.

Qualified disaster distributions are permitted without regard to your need or the actual amount of your economic loss. Examples of an economic loss include, but aren’t limited to:

Eligible retirement plan.

An eligible retirement plan can be any of the following.

Applicable date.

The term “applicable date” means the latest of:

Distribution limit for qualified disaster recovery distributions.

The total of your qualified disaster recovery distributions from all plans is limited to $22,000 per disaster. If you take distributions from more than one type of plan, such as a 401(k) plan and an IRA, and the total amount of your distribution exceeds $22,000, you may allocate the $22,000 limit among the plans by any reasonable method you choose.

Qualified disaster area for qualified disaster distributions.

A qualified disaster area is any area with respect to which a major disaster was declared after 2017 and before February 26, 2021, by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, except the California wildfire disaster area defined in the Bipartisan Budget Act of 2018, or any area with respect to which a major disaster has been declared solely due to COVID-19.

Incident period for qualified distributions.

The incident period for any qualified disaster is the period specified by the Federal Emergency Management Agency (FEMA) as the period during which the disaster occurred, but not including any dates before 2018. This includes those disasters that occurred on or after December 28, 2020, and continued no later than January 26, 2021.

Qualified disaster distribution.

A qualified disaster distribution for 2018, 2019, and 2020 disasters are those distributions from an eligible retirement plan:

Distribution limit for qualified disaster distributions.

The total of your qualified disaster distributions from all plans is limited to $100,000 per disaster for certain major disasters that occurred in 2018, 2019, and 2020. If you take distributions from more than one type of plan, such as a 401(k) plan and an IRA, and the total amount of your distributions exceeds $100,000 for a single disaster, you may allocate the $100,000 limit among the plans by any reasonable method you choose.

Exceptions.

You can't repay the following types of distributions.

Repayment of distributions if reporting under the 1-year election.

If you elect to include all of your qualified disaster distributions received in a year in income for that year and then repay any portion of the distributions during the allowable 3-year period, the amount repaid will reduce the amount included in income for the year of distribution. If the repayment is made after the due date (including extensions) for your return for the year of distribution, you will need to file, with an amended return, a revised Form 8915-C (if the repayment is of a qualified 2018 disaster distribution), a revised Form 8915-D (if the repayment is of a qualified 2019 disaster distribution), or a revised Form 8915-F (in the case of qualified disasters that occurred in 2020 and later years). See Amending Your Return, later.

Repayment of distributions if reporting under the 3-year method.

If you are reporting the distribution in income over the 3-year period and you repay any portion of the distribution to an eligible retirement plan before filing your tax return, the repayment will reduce the portion of the distribution that is included in income for the year. If you repay a portion after the due date (including extensions) for filing your return, the repayment will reduce the portion of the distribution that is included in income on your next year’s return, unless you are eligible to amend your applicable prior year return or returns. (This would be a return for a year beginning the year of the distribution and included in the 3-year period.)

Applicable recontribution period.

You can make this recontribution (or recontributions):

Qualified home purchase distribution.

To be a qualified distribution, the distribution must meet all of the following requirements.

Qualified individual.

You are a qualified individual if both of the following apply.

Examples of an economic loss include, but aren't limited to:

Limits on plan loans.

The $50,000 limit on plan loans is increased to a maximum of $100,000. Also, the additional 50% of the present value of your nonforfeitable vested accrued benefit limit is increased to 100%.

The higher limits apply to loans made during the following periods.

The applicable date for a qualified disaster would be the latest of:

1-year suspension of plan loan payments.

Payments on loans that become due during the period beginning on the qualified beginning date and ending on the date that is 180 days after the last day of the incident period may be suspended for 1 year (suspension period) by the administrator. The qualified beginning date is:

If you are a qualified individual based on more than one disaster, use the suspension period with the earliest beginning date.