Tax Matters

Federal Income Tax

All income is eventually taxable. Retirement contributions that were made with tax-deferred dollars will be subject to Federal income tax requirements when you take a distribution from your account. Many people find it advantageous to postpone withdrawals until they retire because their income tax bracket is generally lower.

TIAA-CREF and Fidelity are required by federal regulations to withhold 20% from certain types of distributions. This is not a penalty; it is a federal income tax withholding at the time of distribution. When you file your taxes for the year, you may owe more or less, depending on your final tax liability.

The following types of distributions are subject to the mandatory 20% withholding:

  • Cash withdrawals (single sum, lump sum and systematic).
  • SRA Disability withdrawals.
  • TIAA Traditional Transfer Payout Annuity.
  • Fixed-period annuities of less than 10 years.
  • TIAA Traditional Interest Only payments.
  • TIAA-CREF Retirement Transition Benefit.

The following types of distributions are not subject to the mandatory 20% withholding:

  • TIAA-CREF lifetime annuities.
  • Fixed-period annuities of 10 years or longer.
  • SRA Hardship withdrawals.
  • Minimum distribution payments.

IRS 10% Penalty

The Internal Revenue Service (IRS) imposes a 10% early withdrawal penalty if you take a distribution from a qualified retirement plan (such as the Basic Retirement Plan or 403(b) SRA) prior to age 59½, unless an exception is met. If an exception is not met, you must pay the penalty each time you withdraw funds before you are age 59½. The penalty does not apply to distributions of your contributions and earnings from the U-M 457(b) Deferred Compensation Plan.

The 10% penalty is not withheld at the time of the distribution; you pay it when you file your federal income tax return. TIAA-CREF or Fidelity will issue Form 1099-R to you for the distribution at the end of the year. You must include the 1099-R with your federal tax return.

Exceptions to the 10% Penalty

Exceptions to the IRS penalty are listed below. Note that there are additional exceptions to the penalty, some of which only apply to IRA distributions, which are not listed below. Consult with a qualified tax adviser if you have questions.

  • You terminate employment from the university during or after the calendar year in which you reach age 55. Important: This exception to the penalty does not apply to an IRA. If you rollover your U-M retirement accumulations to an IRA and then take a distribution from the IRA prior to age 59½, this exception to the penalty is no longer available to you.
  • You terminate your employment at the university and take the distribution as a series of payments (at least one every year) based on your life expectancy (or the life expectancy of you and your annuity partner). The payments must be substantially equal in amount and must continue without change (unless you become disabled or die) for five years or until you reach age 59½, whichever comes later.
  • You are an active-duty military reservist. Military reservists called to active duty can receive payments from their individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without having to pay the early-distribution tax.
  • You become totally and permanently disabled.
  • Qualified retirement plan distributions used to pay for tax-deductible medical expenses that exceed 7.5% of your adjusted gross income. This exception does not apply to distributions made from an IRA for this purpose.
  • Qualified retirement plan distributions made to an alternate payee under a Qualified Domestic Relations Order (QDRO). This exception does not apply to distributions made from an IRA for this purpose.
  • In the event of your death.

IRS Form 5329

If you qualify for one of the exceptions to the early withdrawal penalty, you may need to file IRS Form 5329 with your federal return in order to claim the exception to the penalty. Part I, Line 2 of the form allows you to list a code indicating which exception to the penalty you are claiming. You can download IRS Form 5329 along with the instructions for completing the form and the codes to claim an exception to the penalty by visiting the IRS website.

Your W-2

Your W-2 will display the amount of contributions, if any, that you have made to the U-M retirement savings plans This information can appear in more than one box, depending on which plans you have contributed to during the year The U-M matching contribution for the Basic Retirement Plain is not reported on this form

Box 12

  • Code E: Contributions you make to the retirement plan on a voluntary basis are called 403(b) elective deferrals. This includes any supplemental (SRA) contributions and the 5% or 4.5% you contribute to the Basic Retirement Plan on your entire salary as a voluntary participant.If you are a compulsory participant in the Basic Retirement Plan, your 403(b) elective deferrals consist of any 403(b) SRA contributions and your Basic Retirement Plan contribution on your U-M earnings only up to the Social Security wage base ($118,500 for 2015).
  • Code G: Your contributions to the 457(b) Deferred Compensation Plan are called 457(b) elective deferrals This amount will appear in Box 12 with code “G” next to it.

Box 14

  • If you are a compulsory participant in the Basic Retirement Plan, your contribution on your U-M earnings over the Social Security wage base ($118,500 for 2015) is a mandatory 401(a) contribution and is reported in Box 14 with the label “401a” You will not see a figure in Box 14 with the label “401a” if your earnings are less than the Social Security wage base, or if you are a voluntary participant in the Basic Retirement Plan.

IRS Retirement Saver’s Credit

The IRS Retirement Saver’s Credit is a nonrefundable tax credit available to eligible individuals who make elective contributions to certain types of retirement plans.It is designed to encourage people to save for retirement.You may be eligible for a credit of up to $1,000 for combined voluntary contributions you make to the following types of plans:

  • Employer-sponsored 401(k) or 403(b) plans, a governmental 457(b) plan, SIMPLEs, and SEPs.
  • Individual or spousal contributions to an IRA, (both traditional and Roth).
  • After-tax contributions you make to a qualified retirement plan.

Depending on your adjusted gross income, you may be eligible for a maximum credit of $1,000.The amount of the credit is based on the adjusted gross income of you and your spouse and the amount of contributions you make.

You are not eligible for the credit if any of the following conditions apply to you:

  • Your adjusted gross income for 2014 is more than $30,000 ($45,000 if head of household; $60,000 if married filing jointly).
  • You are under age 18.
  • You are claimed as a dependent on another taxpayer’s tax return, or are a full-time student.

Consult with a qualified tax advisor for more information and to see if you qualify.

Michigan Income Tax

Michigan tax law permits you to subtract qualifying pension benefits included in your adjusted gross income from Schedule I of the Michigan MI-1040 tax form. This reduces your income that is subject to Michigan income tax. The amount you may subtract depends on the source of the benefit (public versus private retirement plans).

Pension benefits from a public retirement plan, such as the University of Michigan Basic Retirement Plan, are generally an allowed subtraction. This allows you to subtract TIAA-CREF and Fidelity distributions from the Basic Plan (your 5% and the 10% University contributions and earnings) on Line 12 of Schedule I of the Michigan MI-1040 tax form.

However, you cannot subtract distributions attributable to:

  • Additional or supplemental contributions and earnings you made to the Basic Retirement Plan (those made in addition to your 5% contribution necessary to receive the U-M 10% matching contribution).
  • Contributions and earnings you made to the Supplemental Retirement Account or SRA.
  • Contributions and earnings you made to the U-M 457(b) Deferred Compensation Plan.

In addition, your ability to take a subtraction may be limited if you also receive benefits from a private pension. The booklet for the Michigan MI-1040 provides instructions for Line 12 to determine to what extent the subtraction may be taken for both public and private retirement plan benefits.

As always, you should seek expert tax advice for your own tax situation.

For more information, contact:

Michigan Department of Treasury
Lansing , MI 48922
Income Tax Information

Pension and Retirement Income and Income Tax Liability, Michigan Taxes, Department of Treasury

Reference: Michigan Income Tax Act of 1967, Michigan Income Tax Section 206.30(1)(f)(i) of the Act.


Tax information is based on the university’s current understanding of highly complex Internal Revenue Code and U.S. Treasury Department regulations. It is provided for general informational purposes only. The University of Michigan does not provide tax advice. It is the responsibility of the plan participant to comply with federal tax regulations. Questions or concerns should be addressed to a qualified tax adviser.