IRA Rules : Although tax deferred annuities or TDA’s, closely track the taxation rules for qualified plans, there are some important differences.
Ordinary income tax applies. In general distributions from TDA’s will be taxed along with the rest of your income at normal tax rates unless you roll over the distribution. But you may not exclude from your income the net unrealized appreciation in employer stock as you can with a qualified plan.
Rollover. As with qualified plan distributions, you may roll over any portion of a TDA distribution into an IRA or another retirement plan. However if you roll over the TDA distribution into a qualified plan you forfeit the right to use ten-year averaging on any future distribution from that qualified plan.
Averaging and capital gain treatment not allowed. Ten year averaging is not permitted for distributions from TDA’s nor is capital gain treatment for pre-1974 accumulations. Distributions from TDA’s must be rolled over or they will be subject to ordinary income tax at the tax rates in effect in the year of distribution.
QDRO rules apply. The QDRO rules apply to TDA’s just as they do to qualified plans, except that the alternate payee is not permitted to use ten year averaging or the special capital gain treatment.
Hardship distributions permitted. Hardship distributions from TDA’s are permitted and are subject to the same rules as hardship distributions from 401k plans.