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Tax Issues
This information is not intended to be considered or construed, 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, which means participants do not pay current income tax on account contributions. The contributions and related investment earnings are subject to regular income tax when drawn from the plan and paid directly to the participant. The income tax is deferred to a later date and is due due for the year in which 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, whereas a single lump sum payment would mean that all of the funds 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 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 tax-deferred status if they are rolled over to another qualifying retirement plan or a Rollover IRA. These payments are typically either a single payment (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. The mandatory income tax withholding is not applied to distributions from IRAs.