ARIZONASTATERETIREMENTSYSTEM(ASRS)
SPECIALTAXNOTICEREGARDINGPLANPAYMENTS–SURVIVORBENEFITS
FederalTaxInformation
Introduction -ThisnoticecontainsimportantinformationregardingyourfederalincometaxoptionsforyoursurvivorbenefitdistributionfromtheASRS.Allreferencesto"theCode"arereferencestotheInternalRevenueCodeof1986,asamended.Thisnoticesummarizesonlythefederal(notstateorlocal)taxruleswhichapplytoyourdistribution.Becausetheserulesarecomplexandcontainmanyconditionsandexceptionsnotdiscussedinthisnotice,youmaywanttoconsultwithaprofessionaltaxadvisorbeforeyoureceiveyourdistributionfromtheASRS. Also,youcanfindmorespecificinformationonthetaxtreatmentofpaymentsfromqualifiedemployerplansinIRSPublication575,PensionandAnnuityIncome,andIRSPublication590,IndividualRetirementArrangements.ThesepublicationsareavailablefromyourlocalIRSoffice,ontheIRS’websiteat
Spouse Beneficiary/Alternate Payee
Types Of Plan Distributions-TheCodeclassifiesdistributionsintotwotypes:(1)distributionsyoumayrollover(eligiblerolloverdistributions),and(2)distributionsyoumaynotrollover.Youalsomayreceiveadistributioninwhichpartofthedistributioniseligibleforarolloverdistributionandpartisnoteligibleforarolloverdistribution.TheASRSwillassistyouinidentifyingwhichportionofyourdistributionisaneligiblerolloverdistributionandwhichportionisnotaneligiblerolloverdistribution.
AneligiblerolloverdistributionisanydistributiontoyouofalloranyportionofyoursurvivorbenefitundertheASRSexcept:
(1)SubstantiallyEqualPayments-Youmaynotrolloveradistributionifitispartofaseriesofsubstantiallyequalpaymentsmadeatleastonceayearandwhichwilllastfor:(1)yourlifetime(oryourlifeexpectancy),(2)yourlifetimeandyourbeneficiary’slifetime(orlifeexpectancies), or(3)aperiodoftenyearsormore.
(2)RequiredMinimumDistributions-IftheASRSmakesrequiredminimumdistributionstoyou,youmaynotrollovertherequiredminimumdistributions.
(3)HardshipDistributions-Ahardshipdistributionisnoteligibleforrollover.
Right to Waive the 30-day Notice Period-Afterreceivingthisnotice,youhaveatleast30daystoconsiderwhetherornottohaveyourbenefitdirectlyrolledover.Ifyoudonotwishtowaituntilthis30-daynoticeperiodendsbeforeyourelectionisprocessed,youmaywaivethenoticeperiodbymakinganaffirmativeelectionontheappropriateapplicationindicatingwhetherornotyouwishtomakeadirectrollover.Yourbenefitwillthenbeprocessedinaccordancewithyourelectionassoonasispractical.
Direct Rollover-Youmayelectadirectrolloverofalloranyportionofaneligiblerolloverdistribution.Ifyouelectadirectrollover,theASRSwillpaytheeligiblerolloverdistributiondirectlytoyourdesignatedIRAortoanothereligibleretirementplanwhichyouhavedesignated.Aneligibleretirementplanis:(1)aqualifiedemployerplandescribedinCode§401(a),(2)anannuityplandescribedinCode§403(a),(3)aneligibledeferredcompensationplandescribedinCode§457(b)thatismaintainedbyastateorpoliticalsubdivisionofastateoranyagencyorinstrumentalitythereofor,(4)anannuitycontractdescribedinCode§403(b).AdirectrolloveramountisnotsubjecttotaxationuntilyoureceiveadistributionfromtheIRAoreligibleretirementplan.
Ifyouelectadirectrollover,yourelectionformmustincludeidentifyinginformationabouttheIRAoreligibleretirementplan.Priortoelection,youwillneedtocontactthefinancialinstitutionthatsponsorstheIRAortheeligibleretirementplanto:(1)determineiftheIRAoreligibleretirementplanwillacceptyourdirectrollover,and(2)determinetheprocedureformakingadirectrollovertothatIRAoreligibleretirementplan.
IfyourASRSdistributionisaseriesofpaymentsoveraperiodoflessthantenyears,eachpaymentisaneligiblerolloverdistribution.YourelectiontomakeadirectrolloverwillapplytoallpaymentsunlessyouadvisetheASRSofachangeinyourelection.
Ifyourdistributionexceeds$500,youmayelectadirectrolloverofalloranypartofyourdistribution,providedtheportiondirectlyrolledover isat least$500. Ifyour distributionisatleast $200butlessthan$500, youmust electeither adirectrolloveroftheentireamountoracceptadirectdistributionoftheentireamount.Ifyourdistributionislessthan$200,youmusttakeadirectdistributionandarenoteligibletorollover.
Option to Rollover Distribution-Thedirectrolloverexplainedaboveisnottheonlywaytomakearollover.Ifyoureceivepaymentofaneligiblerolloverdistribution,youstillmayrolloveralloranyportionofthedistributiontoanIRAoraneligibleretirementplanthatacceptsrollovers.Ifyoudecidetorolloverthedistribution,youmustmaketherolloverwithin60daysofyourreceiptofthepayment.TheportionofyourdistributionyouelecttorolloverisnotsubjecttotaxationuntilyoureceiveadistributionfromtheIRAoreligibleretirementplan.
Youmayrollover100%ofyoureligiblerolloverdistributioneventhoughtheASRShaswithheld20%ofthedistributionforincometaxwithholding(seeWithholdingonEligibleRolloverDistributionsbelow).Ifyouelecttorollover100%ofthedistribution,youmustcontributeothermoneytotheIRAoreligibleretirementplanwithinthe60-dayperiodtoreplacethe20%withheld.Ifyouelecttorolloveronlythe80%whichyoureceive,the20%withheldwillbesubjecttotaxation.
Example: Assumeyoureligiblerolloverdistributionis$5,000,andyoudonotelectadirectrollover. TheASRSpaysyou$4,000,withholding$1,000forincometaxes. However,assumewithin60daysafterreceivingthe$4,000payment,youdecidetorollovertheentire$5,000distribution.Tomaketherollover,youwillrolloverthe$4,000youreceivedfromtheASRSandyouwillcontribute$1,000fromothersources(yoursavings,aloan,etc.).Inthiscase,youwillnothaveanytaxliabilitywithrespecttotheASRSdistribution.TheASRSwillreporta$5,000distributionfortheyear,andyouwillreporta$5,000rollover.Furthermore,whenyoufileyourincometaxreturn,youmayreceivearefundofthe$1,000withheld. Ifyourolloveronlythe$4,000paidfromtheASRS,the$1,000youdonotrolloveristaxable.Whenyoufileyourincometaxreturn,youstillmayreceiveanincometaxrefund,buttherefundlikelywillbesmallerbecause$1,000ofthedistributionistaxable.
After-tax Contributions -Ifyourdeceasedspousemadeafter-taxcontributionstotheASRS,youmayrolloverthesecontributionsintoeitheranIRAorcertaineligibleretirementplansthatacceptrolloversoftheafter-taxcontributions.Thefollowingrulesapply:
After-taxrollovertoanIRA-YoumayrollovertoanIRAapaymentthatincludesafter-taxcontributionsthrougheitheradirectrolloverora60-dayrollover.TheASRSwillassistyouinidentifyinghowmuchofyourpaymentisthetaxableportionandhowmuchistheafter-taxportion. If youroll over after-tax contributionstoanIRA,itisyour responsibilitytokeeptrackof,and reporttotheIRSontheapplicableforms,theamountoftheseafter-taxcontributions.ThiswillenableyoutodeterminethenontaxableamountofanyfuturedistributionsfromtheIRA.Onceyou rollover theafter-taxcontributionstoanIRA, youmayNOT laterrolloverthoseamountstoaneligibleretirementplan,butmayrollovertheafter-taxcontributionstoanotherIRA.
If youmake adirect rolloverofonlyaportionofthe amount paidfromthe ASRSandaportionis paid to you orifyou make a 60-dayrollovertoanIRAofonlyaportionofthepaymentmadetoyou,theafter-taxcontributionsaretreatedasrolledoverlast.Forexample,assumeyourlumpsumdistributiontotals$12,000,ofwhich$2,000isafter-taxcontributions.Inthiscase,ifyourollover$10,000toanIRAinadirectrolloverorina60-dayrollover,noamountistaxablebecausethe$2,000amountnotrolledoveristreatedasbeingafter-taxcontributions.
After-taxrollovertoaneligibleretirementplan–Exceptasprovidedinthenextsentence,youmaydirectlyrolloverafter-taxcontributionsfromtheASRStoanothereligible retirementplan(including adefinedbenefit plan) iftheotherplanwillaccepttherolloverandprovidesseparateaccountingforamountsrolledover,includingseparateaccountingfortheafter-taxemployeecontributionsandearningsonthosecontributions.YoumayNOTrolloverafter-taxcontributionsfromthe ASRStoagovernmental 457plan.Ifyouwanttorolloverafter-tax contributionsto aneligible retirementplanthatacceptsthese rollovers,youcannothavetheafter-taxcontributionspaidtoyoufirst;rather,theafter-taxcontributionsmustbetransferred directlytotheothereligibleretirementplan.YoumustinstructtheASRStomakeadirectrolloveronyourbehalf.
Rollover to Roth IRA-IfyourolloverthepaymenttoaRothIRA,aspecialruleappliesunderwhichtheamountofthepaymentrolledover(reducedbyanyafter-taxamounts)willbetaxed.However,the10%additionalincometaxonearlydistributionsdescribedbelow willnotapply (unlessyoutaketheamount rolledover outoftheRothIRAprior to attainingage59½ andwithin5years,countingfromJanuary1oftheyearoftherollover).
IfyourolloverthepaymenttoaRothIRA,laterpaymentsfromtheRothIRAthatarequalifieddistributionswillnotbetaxed(includingearningsaftertherollover).Aqualified distributionfromaRothIRAisapaymentmadeafteryouareage59½(orafteryourdeathordisability,orasaqualifiedfirst-timehomebuyerdistributionofupto$10,000)andafteryouhavehadaRothIRAforatleast5years.Inapplyingthis5-yearrule,youcountfromJanuary1oftheyearforwhichyourfirstcontributionwasmadetoaRothIRA.PaymentsfromtheRothIRAthatarenotqualifieddistributionswillbetaxedtotheextentofearningsaftertherollover,includingthe10%additionalincometaxonearlydistributions(unlessanexceptionapplies).YoudonothavetotakerequiredminimumdistributionsfromaRothIRAduringyourlifetime.Formoreinformation,seeIRSPublication590,IndividualRetirementArrangements(IRAs).
Withholding on Eligible Rollover Distributions - Theportionofaneligiblerolloverdistributionthatyouelecttoreceiveistaxabletoyouunless,within60days,yourolloverthedistributiontoanIRAortoanothereligibleretirementplan.Inaddition,the taxable portionofyour eligible rollover distributionissubject to 20% federal income taxwithholding.Youmaynotwaive thiswithholding. Forexample,ifyoureligiblerolloverdistributionis $5,000,theASRSwill payyouonly $4,000andremitto the IRS$1,000asincometaxwithholding.YouwillreceiveaForm1099-RfromtheASRSreportingthefull$5,000asadistributionfromtheASRS.The$1,000withholdingamountappliesagainstanyfederalincometaxyoumayowefortheyear.Thedirectrolloveristheonlymeansofavoidingthis20%withholding.
Withholding on Distributions Not Eligible for Rollover - The20%withholdingdoesnotapplytoanyportionofyourtaxabledistributionthatisnotaneligiblerolloverdistribution.Youmayelectwhethertohavefederalincometaxwithholdingapplytothatportion.Ifyoudonotwishtohaveanyincometaxeswithheldonthatportionofyourdistribution,youwillneedtosignanddateawithholdingelectionform.TheASRSwillprovideyouwithawithholdingelectionformifyourdistributionincludesanamountthatdoesnotconstituteaneligiblerolloverdistribution.IfyoudonotreturnthewithholdingelectionformtotheASRSpriortothedistribution,theASRSwilltreatthefailuretoreturntheformasanaffirmativeelectiontohavea20%withholdingapply.
10% Penalty Tax -The10%penaltytaxdoesnotapplytosurvivorbenefitdistributionstoabeneficiary.However,ifyourolloverthesurvivorbenefit,thetaxableportionofanydistributionyoureceivefromyourIRAoreligibleretirementplanbeforeyoureachtheageof59½issubjecttoa10%penaltytaxinadditiontofederalincometaxesunlessanexceptionapplies.SeeIRSForm5329formoreinformationonthe10%penaltytax.
Lump Sum Distribution-Ifyourdistributionisalumpsum distribution,andyourdeceasedspousewasbornbefore1936,youmayelectspecialtaxtreatment,butonlyifyoudonotrolloveranypartofthelumpsumdistribution. Alumpsumdistributionisadistribution,withinonecalendaryear,ofyourentiresurvivorbenefit(includingthenontaxableportionofyourdistribution)undertheASRS.Youmayelectspecialtaxtreatment,knownasincomeaveraging,byfilingIRSForm4972withyourincometaxreturn.TheinstructionstoIRSForm4972providefurtherdetailsregardingthereportingofyourlumpsumdistributionanddescribetherulesfordeterminingwhetheradistributionqualifiesasalumpsumdistribution.Asageneralrule,youmaynotelectincomeaveragingforalumpsumdistributionifyourdeceasedspouseelectedincomeaveragingwithrespecttoapriorlumpsumdistributionshe/hereceivedafterDecember31,1986,oraftershe/heattainedage59½.
Alternate Payees-Ingeneral,therulessummarizedabovethatapplytopaymentstospousebeneficiariesalsoapplytopaymentstospousesorformerspouseswhoare“alternatepayees.”YouareanalternatepayeeifyourinterestintheASRSresultsfroma“qualifieddomesticrelationsorder”(QDRO)whichisanorderissuedbyacourt,usuallyinconnectionwithadivorceorlegalseparation.Inaddition,yourpaymentfromtheASRSundertheQDROisnotsubjecttotheadditional10%taxdescribedinthisnotice,evenifyouareyoungerthanage59½.However,ifyouareanalternatepayeeandrolloveryourQDROdistributiontoanothereligibleplanorIRA,anydistributionfromthatothereligibleplanorIRAbeforeyoureachtheageof59½issubjecttoa10%penaltytaxinadditiontofederalincometaxesunlessanexceptionapplies.SeeIRSForm5329formoreinformationonthe10%penaltytax.
Non-Spouse Beneficiary & Electing Spouse Beneficiary
Eligibility for Rollover (Inherited IRA)– Theserulesapplyto non-spouse beneficiariesand spouses who elect tobe treated asanon-spousebeneficiarybyrollingoverthespouse’sdistributiontoanIRAandelectingtotreattheIRAasaninheritedIRA.Youeithermayreceivea directdistribution of thesurvivorbenefitormaydirectly roll overthesurvivorbenefittoaninheritedIRAyouestablishtoreceivethedistribution.Ifyoureceivethesurvivorbenefitdirectly,yousubsequentlymaynotrolloverthesurvivorbenefittoaninheritedIRA.IfyourolloverthesurvivorbenefittoanIRA,therollovermustbebyadirecttransfer(i.e.,directrollover)fromthe ASRStotheIRA.YoumaynotrolloverthesurvivorbenefitdistributiontoanyretirementplanotherthantoanIRA.Youalsomaynotrolloveranydistributionthatthememberwouldhavehadtotakeasa“lifetime”requiredminimumdistributionfortheyearofthemember’sdeath.TheCodetreatstherolloverIRAasan“inherited”IRA.Thismeansyou,atalaterdate,maynottransfertheIRAassetstoanotherIRAyouownortoanyotherretirementplan.TheinheritedIRAmustbetitledinamannerthatreflectsthedecedentandthebeneficiary,suchas“JessicaJones,asbeneficiaryofWilliamJones.”IfyouelectadirectrolloverofthesurvivorbenefittoanIRA,theASRSwillpaythesurvivorbenefitdirectlytotheIRAyouhavedesignated.Adirectrolloveramountisnotsubjecttotaxationatthetimeoftherollover.ThetaxableportionofyourdirectrolloverwillbetaxedlaterwhenyoutakeitoutoftheIRA.The10%penaltytaxfordistributionsbeforeage59½willnotapplytoalaterdistributionfromtheIRA,evenifyouarenotage59½atthetimeofthedistribution.
If yourdistributionexceeds $500,youmayelectadirectrolloverofall oranypartofyourdistributionprovided theportiondirectlyrolledoverisatleast$500.Ifyourdistributionisatleast$200butlessthan$500,youmustelecteitheradirectrolloveroftheentireamountoracceptadirectdistributionoftheentireamount.Ifyourdistributionislessthan$200,youmusttakeadirectdistributionandarenoteligibletorollover. In addition, non-spouse beneficiaries must roll over to an inherited IRA by December 31 of the first calendar year following the year of death. Spouse beneficiaries must roll over by December 31 of the later of (1) the first calendar year following the year of death, or (2) the calendar year the member would have reached 70 ½.
After-tax Contributions-Ifthedeceasedmembermadeafter-taxcontributionstotheASRS,youmayrolloverthesecontributionstotheIRA youestablishtoreceive therollover.However,if youroll overafter-taxcontributionstoanIRA,itis yourresponsibilitytokeeptrackof,andtoreport to theIRSon theapplicableforms,theamountof theseafter-taxcontributions.ThiswillenableyoutodeterminethenontaxableamountofanyfuturedistributionsfromtheIRA.
IfyoumakeadirectrolloverofonlyaportionoftheamountpaidfromtheASRSandaportionispaidtoyou,theafter-taxcontributionsaretreatedasrolledoverlast.Forexample,assumeyour lumpsumdistributiontotals$12,000,ofwhich$2,000isafter-taxcontributions.Inthiscase,ifyourollover$10,000toanIRAinadirectrollover,noamountistaxablebecausethe$2,000amountnotrolledoveristreatedasbeingafter-taxcontributions.
Rollover to Inherited Roth IRA-IfyourolloverthepaymenttoaninheritedRothIRA,aspecialruleappliesunderwhichtheamountofthepaymentrolledover(reducedbyanyafter-taxamounts)willbetaxed.
IfyourolloverthepaymenttoaninheritedRothIRA,thesameminimumdistributionrulesapplytotheinheritedRothIRAasapplytodistributionsfromatraditionalIRA.Ingeneral,youwillneedtocommencereceivingdistributionsforeachyearbeginningwiththeyearafterthemember’sdeath.SinceyouhavealreadypaidincometaxontheentireamountrolledovertotheinheritedRothIRA(reducedbyanyafter-taxamountsrolledover),anyfurtherdistributionsfromtheinheritedRothIRAwillnotbesubjecttoincometaxorthe10%additionalincometaxonearlydistributionseventhoughyouhavenotattainedage59½.Formoreinformation,seeIRSPublication590,IndividualRetirementArrangements(IRAs).
Distributions You Receive -Thetaxableportionofasurvivorbenefitthatyouelecttoreceiveistaxabletoyouintheyearyoureceivethedistribution.The10%penaltytaxdoesNOTapplytosurvivorbenefitdistributions toabeneficiary.If youelecttorolloverthedistributiontoanIRA,foreachyearbeginningwiththeyearafterthemember’sdeath,youmusttakeaminimumrequireddistribution.AnydistributionyousubsequentlytakefromtheIRAistaxabletoyouintheyearyoureceivethedistribution,andisnoteligibleforrollovertoanotherIRAortoanyotherretirementplan.TheIRAtrusteeorcustodian,oryourtaxadvisor,canhelpyoudeterminetheamountofeachyear’srequireddistributionamount.
Federal Income Tax Withholding -Ifyoureceivedirectly,ratherthanrollover,aneligiblerolloverdistribution,thetaxableportionofthedistributionis subjectto 20% federal income taxwithholding.Youmaynotwaive thiswithholding. For example, ifyouelecttoreceiveataxableeligiblerolloverdistribution of$5,000,theASRSwillpayyouonly$4,000andwillsendtotheIRS$1,000asincometaxwithholding.YouwillreceiveaForm1099-RfromtheASRSreportingthefull$5,000asadistributionfromtheASRS.The$1,000withholdingamountappliesagainstanyfederalincometaxyoumayowefortheyear.Thedirectrolloveristheonlymeansofavoidingthe20%withholding.Notethattaxeswithregardtothedistributionmayexceedthe20%withheld.Totheextentadistributionrepresentsacurrentyear’soranyprioryear’srequiredminimumdistribution,theASRSwillwithhold20%federalincometax,however,youmayelectalesseramount.
Lump Sum Distribution -If yourdistributionisalumpsumdistributionandthedeceasedparticipantwas bornbefore1936,youmayelectspecialtaxtreatment.Alumpsumdistributionisadistribution,withinonecalendaryear,ofyourentiresurvivorbenefit(includingthenon-taxableportionofyourdistribution)undertheASRS.Youmayelectspecialtaxtreatment,knownasincomeaveraging,byfilingIRSForm4972withyourincometaxreturn.TheinstructionstoIRSForm4972providefurtherdetailsregardingthereportingofyourlumpsumdistributionanddescribetherulesfordeterminingwhetheradistribution qualifiesasalumpsumdistribution.
Inherited Ira Guidelines For A Beneficiary
PensionProtectionActof2006-ThePensionProtectionAct(PPA)of2006introducedtheopportunityforanon-spousebeneficiarytorollovertoaninheritedIRA.TheSpecialTaxNoticeRegardingPlanPaymentsprovidesinformationaboutaninherited IRA.Theinformationprovidedhere is ageneralguidelinefor yourconvenience.It isrecommended thatyouseektheadviceofataxprofessionalorcontacttheInternalRevenueServiceforadditionalinformation.
ThePPAusesthemember’sage(underoroverage70½)inthecalendaryearofdeath,themember’sstatus(retiredornon-retired),andthecalendaryearinwhichyou rollovertodeterminehowtheASRStreatsthesurvivorbenefitasnotedbelow.
1.Thenon-retired or retired memberdidnotreachtheageof70½inthecalendaryearofdeath.
Ifyourollover:
(1)Inthecalendaryearofthemember’sdeath,youmayrolloveralloraportionofthesurvivorbenefit.
(2)In thecalendar yearfollowingthemember’syear ofdeath, aminimumdistributionmust bepaidto youandyoumay rolloveralloraportionoftheremainingsurvivorbenefit.
Non-spouse beneficiaries mustrolloverbyDecember31ofthefirstcalendaryearfollowingtheyearofdeath. Youcannotrolloverafterthisdate.
Spouse beneficiaries must roll over by December 31 of the later of (1) the first calendar year following the year of death, or (2) the calendar year the member would have reached 70 ½.
2.The non-retired member was at least 70½ in the calendar year of death AND the member was not terminated.
The member’s estate may be entitled to a required minimum distribution in the calendar year of death. The remaining funds are the survivor benefit.
If you roll over:
(1)Inthecalendaryearofthemember’sdeath,youmayrolloveralloraportionofthesurvivorbenefit.
(2)Inthecalendar yearfollowing themember’syear ofdeath, a minimumdistribution must bepaid to you andyoumay rolloveralloraportionoftheremainingsurvivorbenefit.
YoumustrolloverbyDecember31ofthefirst calendaryearfollowingtheyearofdeath. You cannot rollover after this date.
3.The retired member dies after reaching age 70 ½.
Ifyourollover:
(1)Inthecalendaryearofthemember’sdeath,youmayrolloveralloraportionofthesurvivorbenefit.
(2)In thecalendar yearfollowingthemember’syear ofdeath, aminimumdistributionmust bepaidto youandyoumay rolloveralloraportionoftheremainingsurvivorbenefit.
You must roll over by December 31 of the first calendar year following the year of death (to avoid tax penalties).
Estates and Trusts- Estatesare noteligible toroll over. Sometrustsmay beeligible to roll over toaninheritedIRAandwouldrequireawrittenopinionfromyourtaxcounsel.
Special Tax Notice Survivor Benefit Plan PaymentsPage 1 of 5Revised: 07/28/2016