Information & Tools for Campus Employees

Home > For Campus Employees > Optional Retirement Program > Drawing Benefits from the ORP > Tax Issues

Tax Issues

The information provided in this section addresses tax treatment of distributions from the ORP by the Internal Revenue Service. This information is not intended to be considered or construed, in any way, as tax advice. Participants should discuss these issues and their personal tax situation with qualified counsel.

Tax Deferral

Contributions to the ORP are tax-deferred. This means that participants do not pay current income tax on the contributions when they are remitted to their ORP account. The contributions and their related investment earnings are subject to regular income tax when drawn from the plan and paid directly to the participant.

Hence, the contributions and investment earnings that grow in a participant’s account are “tax-deferred”. The income tax is deferred to a later date.

Taxes are due each year when funds are drawn from the plan. A stream of income, or a series of payments over several years, would incur income tax liabilities only on the amount distributed in any given year.

A single, lump sum payment would mean that all of the funds distributed are taxable in a single year.

Early Withdrawal Penalty

Certain distributions to participants younger than age 59 ½ may be subject to an early withdrawal penalty imposed by the Internal Revenue Service. These payments are generally “short term” distributions, such as lump sums and other “streams” of income structured for a period less than the participant’s life expectancy. The Early Withdrawal Penalty is applied in addition to regular income tax due on the amounts distributed.

Rollover Treatment

Some distributions from the ORP may maintain their tax-deferred status if they are “rolled over” to either another qualifying retirement plan or a Rollover IRA. These payments are typically either a single payment (lump sum) or a series of substantially equal payments structured for less than ten years.

Mandatory Withholding

Payments from retirement plans (directly to participants and beneficiaries) that are “short term” in nature (e.g. generally structured for fewer than ten years) are subject to mandatory income tax withholding by the Internal Revenue Service. The mandatory withholding rate is 20% of the amount distributed.

The mandatory income tax withholding is not applied to distributions from IRAs.


Contact Us | Subscribe to Our E-Newsletter | Email the Webmaster | Privacy Policy | Terms of Use | Accessibility Statement

Massachusetts Department of Higher Education. All Rights Reserved. ©2000-2014
One Ashburton Place, Room 1401, Boston, MA 02108   617-994-6950