Income tax (Federal): Payments from a retirement plan directly to either a participant or beneficiary are subject to current federal income tax for the year in which the payment is made.
Income Tax (State): Payments from the Commonwealth’s retirement plans to participants who reside in Massachusetts are not subject to state income tax. However, payments made from the Commonwealth’s retirement plans to participants who reside outside Massachusetts may be subject taxation by their resident state.
Early Withdrawal Penalty: Certain distributions to participants younger than age 59 ½ may be subject to an early withdrawal penalty imposed by the IRS. 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 single payments (lump sum) or a series of payments structured for less than ten years.
Mandatory Withholding: Payments from retirement plans (directly to participants and beneficiaries) that are “short term” in nature: 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.