Distribution of benefits from a qualified annuity are generally includible in the recipient's gross income in the year it is paid – except to the extent the amount distributed represents the employee's investment (or basis) in the contract. Special rules apply in the case of certain lump-sum distributions from a qualified plan, distributions that are rolled over to an IRA or another qualified plan, and distributions of employer securities. Further, as noted, distributions before age 59 1/2 from qualified plans and other tax-favored retirement vehicles are subject to an additional 10 percent penalty, unless an exception applies.
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