Retirement Plan Tax Information

The Internal Revenue Code (the “Code”) provides several complex rules relating to the taxation of retirement plan distributions. This notice contains important information you will need before you decide how to receive beneficiary distributions from the plan.

Important Tax Withholding Information

Taxable distributions are subject to federal tax withholding at the rate of 10% (or more, if you choose) on IRA distributions; for 403(b) Plan distributions, withholding is based on the marital status and number of allowances you elect on line 3 of the Withholding Election section on the Beneficiary Distribution form. You are required to elect out of withholding in order for no withholding to apply to the distribution; if you make no election, we will apply the minimum withholding rate for your plan* and deduct the required amount, if any, from your distribution.

For periodic payments, the withholding election will remain in effect until you revoke it. You may change or revoke your withholding election as often as you wish by sending a signed letter to FTIOS at least 15 days before the effective date of the change or revocation.

*For IRA distributions, this rate is 10%. For 403(b) Plan distributions,  this rate is calculated as if you are married and claiming three withholding allowances.

Special Rules For Surviving Spouse Beneficiaries

Rollover Option Surviving spouse beneficiaries may “roll over” a distribution unless it is not eligible for rollover treatment. A rollover is a payment by you or the retirement plan of all or part of your distribution to another eligible IRA or employer plan (see “Eligible IRA or Employer Plan” section below). The amount rolled over is not taxed until it is paid to you from the receiving plan.

Examples of distributions that may not be rolled over are:

  1. Periodic payments over life expectancy or a period of not less than 10 years; or
  2. Payments required under the minimum distribution rules.

If you request a “direct rollover,” FTIOS will pay your distribution directly to an eligible IRA or employer plan. If you have the distribution paid to you, you can keep it or roll it over yourself to an eligible IRA or employer plan within 60 days of your receipt.

Mandatory Tax Withholding on 403(b) Plan Distributions

A distribution eligible for rollover treatment but not directly rolled over by a surviving spouse beneficiary of a 403(b) Plan is subject to mandatory 20% federal tax withholding. If applicable, we will automatically apply the withholding and deduct the required amount from your distribution. As an alternative to a direct rollover, you may choose to receive an eligible rollover distribution (less the 20% federal tax withholding), and then complete the rollover yourself within 60 days of receipt. The drawback to this, of course, is that unless you have other resources to make up the amount that was withheld and roll it over, you will owe taxes on that amount.

Eligible IRA or Employer Plan

An “eligible IRA” includes a Traditional IRA, Rollover IRA, or SEP/SARSEP-IRA. It does not include  a Roth IRA, a SIMPLE IRA or a Coverdell Education Savings Account.

An “eligible employer plan” includes a plan qualified under Section 401(a) of the Code, including a 401(k) plan, Profit Sharing Plan, Defined Benefit Plan, Stock Bonus Plan, and Money Purchase Pension Plan; a 403(a) annuity plan; a 403(b) plan; and a governmental 457 plan. An eligible employer plan is not required to accept a rollover. Before you decide to roll over your payment to another employer plan, you should find out whether the plan accepts rollovers, and if so, the types of distributions it accepts as a rollover. You should also find out about any documents that are required to be completed before the receiving plan will accept a rollover.

30-Day Notice Period And Right Of Waiver

Generally, neither a direct rollover nor a payment can be made from a 403(b) Plan until at least 30 days after your receipt of this notice. Thus, after receiving this notice, you have at least 30 days to consider whether or not to have your distribution directly rolled over. If you do not wish to wait until this 30-day notice period ends before your election is processed, you may waive the notice period by completing and submitting the Franklin Templeton Beneficiary Distribution form. Your distribution will then be processed in accordance with your election as soon as practical after it is received in good order by FTIOS.

This summary, required by law, is very general and does not explain all of the factors that may apply to your individual tax situation. You should obtain IRS Publication 575 (Pension & Annuity Income) and/or IRS Publication 590 (Individual Retirement Arrangements) from your local IRS office or from their website, IRS.gov, or consult with a tax advisor.

Special Tax Notice Concerning Your Plan Distribution From A 403(b) Plan

You are receiving this notice to help you understand the tax consequences of the distribution you are receiving from your employer’s 403(b) plan (the “Plan”),  and your option to roll it over to an IRA or an employer plan. This notice is intended to help you decide whether to do such a rollover. Rules that apply to most plan distributions are described in the General Information About Rollovers section on page 9. Special rules that only apply in certain circumstances are described in the Special Rules and Options section on page 10.

General Information  About Rollovers

How can a rollover affect my taxes?

You will be taxed on a distribution from the Plan if you do not roll it over. If you are under age 59½ and do not roll it over, you will also have to pay a 10% IRS penalty tax on early distributions (unless an exception applies). If you roll over your distribution to an eligible plan, you will not have to pay taxes until you later receive distributions from that plan.

Where may I roll over the distribution?

You may roll over the distribution to either an IRA (including a SEP-IRA) or an employer plan [a tax-qualified plan, section 403(b) plan, or governmental section 457(b) plan] that will accept the rollover. The rules of the IRA or employer plan that holds the rollover will determine your investment options, fees, and rights to distribution from the IRA or employer plan (for example, no spousal consent rules apply to IRAs and IRAs may not provide loans). Further, the amount rolled over will become subject to the tax rules that apply to the IRA or employer plan.

How do I roll over my distribution?

There are two ways to roll over your distribution. You can do either a “direct” rollover or a “60-day”  rollover.

  • If you do a direct rollover, the Plan will make the distribution directly to your IRA or eligible employer plan. You should contact the IRA sponsor or the administrator of the Plan (generally your employer) for information on how to complete the direct rollover.
  • If you do not do a direct rollover, you may still roll over your distribution by depositing it into an IRA or eligible employer plan that will accept it. You will have 60 days after you receive the distribution to complete the rollover deposit. If you do not do a direct rollover, the Plan is required to withhold 20% of the distribution for federal income taxes. This means that, in order to roll over the entire distribution in a 60-day rollover, you must use other funds (e.g., from your personal savings) to make up for the 20% withheld. If you do not roll over the entire amount of the distribution, the portion not rolled over will be taxed and will also be subject to the 10% IRS penalty tax on early distributions if you are under age 59½ (unless an exception applies).

How much may I roll over?

If you wish to roll over your distribution, you may roll over all or part of the amount eligible for rollover. All Plan distributions are eligible for rollover, except:

  • Certain distributions spread over a period of at least 10 years or over your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary);
  • Required minimum distributions after age 70½ (or after death);
  • Financial hardship distributions; and
  • Corrective distributions of contributions that exceed tax law limitations.

The Plan administrator (generally your employer) or the payor can tell you what portion of a distribution is eligible for rollover treatment.

If I don’t roll over my distribution,  will I have to pay the 10% IRS penalty tax on early distributions?

If you are under age 59½, you will have to pay the 10% IRS penalty tax on early distributions for any distribution from the Plan (including amounts withheld for income tax) that you do not roll over, unless one of the exceptions listed below applies:

  • Distributions made after you separate from service if you will be at least age 55 in the year of the separation;
  • Substantially equal periodic distributions that start after you separate from service over your life or life expectancy (or the lives or joint life expectancy of you and your beneficiary);
  • Distribution made due to permanent disability;
  • Distributions after your death;
  • Corrective distributions of contributions that exceed tax law limitations;
  • Amounts paid from the Plan directly to the government to satisfy a federal tax levy;
  • Distributions made under a qualified domestic relations order (QDRO) to a former spouse or alternate payee;
  • Distributions up to the amount of your deductible medical expenses; or
  • Certain distributions made while you are on active duty if you were a member of a reserve component called to duty after September 11, 2001, for more than 179 days.

If I roll over my distribution to an IRA, will the 10% IRS penalty tax apply to early distributions from the IRA?

If you receive a distribution from an IRA when you are under age 59½, you will have to pay the 10% IRS penalty tax on early distributions, unless an exception applies. In general, the exceptions to the 10% IRS penalty tax for early distributions from an IRA are the same as the exceptions listed above for early distributions from a plan. However, there are a few differences for IRA distributions.

  • There is no exception for distributions after separation from service that are made after age 55.
  • The exception for qualified domestic relations orders (QDROs) does not apply (although a special rule applies to a tax-free transfer made directly to an IRA of a spouse or former spouse as part of a divorce or separation agreement).
  • The exception for substantially equal periodic distributions over a specified period applies without regard to whether you have separated from service.
  • There are additional exceptions for (1) distributions used towards qualified higher education expenses, (2) distributions up to $10,000 used in a qualified first-time home purchase, and (3) distributions after you have received unemployment compensation for 12 consecutive weeks (or would have been eligible to receive unemployment compensation but for self-employed status).

Will I owe state income taxes?

Please consult your tax advisor or your state’s tax agency. This notice does not describe any state or local income tax rules (including withholding rules).

Special Rules And Options

What happens if I miss the 60-day rollover deadline?

Generally, the 60-day rollover deadline cannot be extended. However, the IRS has the limited authority to waive the deadline under certain extraordinary circumstances, such as when external events prevented you from completing the rollover by the 60-day rollover deadline. To apply for a waiver, you must file a private letter ruling request with the IRS. Private letter ruling requests require the payment of a nonrefundable user fee. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

What if I was born on or before January 1, 1936?

If you were born on or before January 1, 1936, and receive a lump sum distribution that you do not roll over, special rules for calculating the amount of the tax on the distribution might apply to you. For more information, see IRS Publication 575, Pension and Annuity Income.

Can I roll over my distribution  to a Roth IRA?

Effective January 1, 2010, you may roll over a distribution from the Plan to a Roth IRA (also referred to as a “Roth conversion”), regardless of your income. (Prior to 2010, only individuals with modified adjusted gross incomes up to $100,000 were eligible for such Roth conversions.)

If you roll over your distribution to a Roth IRA, a special rule applies under which the amount rolled over (reduced by any after tax amounts) will be taxed. (This is because of the “tax free distribution”  feature on Roth IRAs.) However, the 10% IRS penalty tax on early distributions will not apply (unless you are under age 59½ and take the amount rolled over out of the Roth IRA within five years, counting from January 1 of the year of the rollover). For Roth conversions made during 2010, the taxable amount can be deferred and split between tax years 2011 and 2012.

Account earnings withdrawn from a Roth IRA will not be taxable so long as the Roth IRA has been in place for five years and a qualifying event is met. For more information on Roth IRAs, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

You cannot roll over a distribution from the Plan to a designated Roth account in an employer plan.

What if I am the beneficiary of a plan participant?

If you receive a distribution after the participant’s death that you do not roll over, the distribution will generally be taxed in the same manner described elsewhere in this notice. However, the 10% IRS penalty tax on early distributions, and the special rule described under the section “If you were born on or before January 1, 1936” applies only if the participant was born on or before January 1, 1936.

  • If you are the surviving spouse, you have the same rollover options that the participant would have had, as previously described in this Notice. In addition, if you choose to roll over your distribution to an IRA, you may treat the IRA as your own or as an inherited IRA.
    An IRA you treat as your own is treated like any other IRA of yours, so that payments made to you before you are age 59½ will be subject to the 10% IRS penalty tax on early distributions (unless an exception applies) and required minimum distributions from your IRA do not have to start until after you are age 70½.
    If you treat the IRA as an inherited IRA, payments from the IRA will not be subject to the 10% IRS penalty tax on early distributions. However, if the participant had started taking required minimum distributions, you will have to receive required minimum distributions from the inherited IRA. If the participant had not started taking required minimum distributions from the Plan, you will not have to start receiving required minimum distributions from the inherited IRA until the year the participant would have been age 70½.
  • If you are a surviving beneficiary other than a spouse, the only rollover option you have is to do a direct rollover to an inherited IRA. Payments from the inherited IRA will not be subject to the 10% IRS penalty tax on early distributions. You will have to receive required minimum distributions from the inherited IRA.

What if I am the spouse of former spouse of a participant receiving a distribution under a Qualified Domestic Relations Order (QDRO)?

If you are the spouse or former spouse of the participant who receives a distribution from the Plan under a QDRO, you generally have the same options the participant would have (for example, you may roll over the distribution to your own IRA or an eligible employer plan that will accept it). Distributions under the QDRO will not be subject to the 10% IRS penalty tax on early distributions.

What if I am a nonresident alien?

If you are a nonresident alien and you do not request a direct rollover to a U.S. IRA or U.S. eligible employer plan, instead of withholding 20%, the Plan is generally required to withhold 30% of the distribution for federal income taxes. If the amount withheld exceeds the amount of tax you owe, you may request an income tax refund by filing IRS Form 1040NR and attaching your Form 1042-S. Also, see Form W-8BEN for instructions on claiming a reduced rate of withholding under an income tax treaty, if applicable to your situation. For more information, see also IRS Publication 519, U.S. Tax Guide for Aliens, and IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Other Special Rules

If a distribution is one in a series of payments for less than 10 years, your choice whether to make a direct rollover will apply to all later payments in the series (unless you make a different choice for later payments).

If your Plan distributions for the year total less than $200, the Plan is not required to allow you to do a direct rollover and is not required to withhold for federal income taxes. However, you may complete a 60-day rollover.

You may have special rollover rights if you recently served in the U.S. Armed Forces. For more information, see IRS Publication 3, Armed

Forces’ Tax Guide.

For More Information

You may wish to consult with the Plan administrator or payor, or your tax advisor, before taking a distribution from the Plan. Also, you can find more detailed information on the federal tax treatment of employer plan distributions in: IRS Publication 575, Pension and Annuity Income; IRS Publication 590, Individual Retirement Arrangements (IRAs); and IRS Publication 571, Tax-Sheltered Annuity Plans [403(b) Plans].

These publications are available from a local IRS office, on the web at IRS.gov, or by calling (800) TAX FORM