February 1, 1993 Pension Payout Warning II Last summer, Congress passed new legislation significantly affecting taxpayers who plan to roll over amounts received from qualified retirement plans. While we have previously written about this in our Newsletter we want to reemphasize the financial impact of this new law. Under the new rules, you will generally want to make a direct transfer of funds (a "trustee-to-trustee" transfer where the distributed funds are never in your name) from the qualified retirement plan to another qualified retirement plan or IRA. If such a direct transfer is not made, 20% of the taxable amount of your distribution will be withheld. If this withholding occurs, you will have to make up the 20% difference out of other funds and contribute 100% of the distributed amount (the 80% you actually received plus the 20% withheld) to another qualified plan or IRA in order to accomplish a totally tax free rollover transaction. You will then have to wait until your next tax return for the year is filed to receive a refund of the 20% withheld. If you fail to roll over the withheld amount, it will be subject to income tax and the 10% premature withdrawal penalty tax if you are not at least age 59 1/2. The bottom line is that for distributions received after 12/31/92, you will no longer be able to actually receive 100% of your funds from a qualified retirement plan and then wait 60 days to make your rollover decision. Example: Denise, age 49, finds a new job and on 1/4/93 receives a $100,000 distribution from her old employerÕs profit-sharing plan. She does not arrange for a trustee-to-trustee transfer, so her old employer withholds $20,000. Denise then immediately rolls over the $80,000 net amount she actually received into an IRA. Denise will be taxed on the $20,000 that was not rolled over, and the 10% penalty tax on premature withdrawals will also apply. If Denise wants to make a totally tax free rollover, she will have to come up with another $20,000 to contribute to the IRA (within 60 days). If she does that, she will then have to wait until her 1993 tax return is filed (in early 1994) to receive a refund of the $20,000 withheld by her old employer. Thus, she will have to wait well over a year to recover her $20,000 from the government. To summarize, the 20% withholding applies unless a trustee-to-trustee transfer occurs-even if the entire amount is eventually rolled over within the required 60-day period. If you expect to receive any retirement plan distributions in the near future, please contact us immediately so that we can ensure that your taxes are minimized. In the meantime, if you have any questions about the new rules affecting rollovers, please do not hesitate to call. Form 1099s Due February is known for birthdays of Presidents, Valentine`s Day and for issuing Form 1099s to independent contractors. A Form 1099 is issued to all non incorporated taxpayers who rendered business services to other businesses and are paid $600 or more in one calendar year. Form 1099 was described in the January newsletter and is the form issued to the provider of the services by the payor. The Form 1099 includes on it the payee`s name, address, taxpayer identification number, and amount paid. Failure for the payor to provide a correct taxpayer identification number (TIN) results in a $50 penalty per each Form 1099 with a $50,000 maximum penalty. In order to obtain the information for the Form 1099s (whether or not you or we are preparing the 1099s) the Form W-9, Request for Taxpayer Identification Number, is the official vehicle to give to the payee to have filled out. One advantage of having a signed W-9 is that if the TIN is incorrect, the $50 penalty will be transferred to the payee from the payor. We advise the Form W-9 be sent out as soon as possible and recommend before a payment is made which reaches the $600 mark, a signed W-9 is obtained. Remember, the deadline to send out Form 1099s is February 28. If you need Form W-9 please call us.