Saccha\'s employer maintains a pension plan and a profit-sharing plan. In the cu
ID: 2576501 • Letter: S
Question
Saccha's employer maintains a pension plan and a profit-sharing plan. In the current year, Saccha separates from the company and receives a total distribution from both plans. Saccha was born in 1930 and had participated in both plans for the last 20 years. What tax method or methods are available to Saccha for the distributions received from both plans?
A. Capital gain (flat 20%) treatment for both plans B. Ordinary income only for the pension plan; ordinary income only for the profit-sharing plan C. Ordinary income only for the pension plan; TYA only for the profit-sharing plan D. TYA only for the pension plan; ordinary income only for the profit-sharing planExplanation / Answer
The answer is option "b" - Ordinary income only for the pension plan; ordinary income only for the profit-sharing plan.
Contributions to pension plans are pre-tax contributions. Because you contribute pre-tax funds, the distributions are taxed at ordinary income rates.
Distributions from a profit-sharing plan are taxable income and must be reported on an individual's tax return. Distributions are taxed at a taxpayer's ordinary income rate.
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