A. There is no easy answer to this question. The following summary is a general description of the applicable federal income tax law at the time this document was prepared. It does not reflect every possible interpretation that might affect your personal situation, nor can it anticipate future changes in the law. You will also periodically receive a description of the tax rules applicable to withdrawals and distributions with your account statements.
Taxable and non-taxable amounts
Money in the Savings Plan is contributed on either a before-tax (tax-deferred) or after-tax (tax-paid) basis.
Earnings in the Roth accounts that are withdrawn or distributed in a qualified distribution are exempt from tax. For all other earnings, taxes are deferred until you take a withdrawal or distribution.
For all withdrawals/distributions you receive in a given year, you will be sent an IRS Form 1099 that sets out the taxable and non-taxable amounts. These forms are also sent to the Internal Revenue Service.
The federal income tax laws regarding amounts you receive from your Savings plan account are complex. It is important to seek advice from a tax professional before making withdrawal, deferral or distribution decisions.
Withdrawals and distributions from Roth accounts
One of the primary advantages of saving for retirement through the Roth accounts is that your entire distribution can be tax-free. Your entire distribution is tax-free if your distribution is a “qualified distribution” as defined by tax law.
A qualified distribution is a withdrawal or distribution made after a 5-year period of Roth participation that is:
1) Paid to you after
- You have reached age 59-1/2 or
- You are disabled (as defined under IRS rules) or
2) Received by your beneficiary as a result of your death.
Your 5-year period of required Roth participation BEGINS on the earlier of:
- January 1 of the year in which you first make a contribution into any of the Roth accounts and
- January 1 of the year in which you first make a contribution into another employer’s Roth 401(k) from which you made a direct rollover into the Roth Rollover Account.
Your 5-year period of required Roth participation ENDS as of December 31 of the 5th consecutive year.
A qualified distribution does not include:
1) deemed distribution of Roth accounts resulting from a loan default, and
2) direct dividend payments on ExxonMobil stock in Roth accounts.
A withdrawal or distribution from the Roth accounts that is not a qualified distribution is a nonqualified distribution. In a nonqualified distribution, only the earnings withdrawn or distributed are taxable. For each dollar withdrawn or distributed, a pro-rata amount is attributable to earnings based on the ratio of earnings in the Roth accounts to the fair market value of the Roth accounts.
Withdrawals from non-Roth accounts
- A withdrawal may consist of tax-paid and/or tax-deferred amounts. A withdrawal from your General account is treated as a withdrawal from your tax-paid balance in that account and is tax-free to you. A withdrawal from your After-tax account is prorated between tax-paid and tax-deferred balances you have in that account. The portion of an After-Tax Account withdrawal attributable to your tax-paid balance is tax-free to you. The remainder is taxable as ordinary income.
- Generally, any hardship withdrawal from your Before-tax account is taxable as ordinary income.
Distributions from non-Roth accounts
- A diversification distribution from your Stock match account is tax-free up to the amount of your tax-paid balance in your General account. The remainder is taxable as ordinary income.
- A total distribution of your non-Roth Accounts is tax-free up to the amount of your tax-paid balances in your General and After-Tax Accounts. The remainder is taxable as ordinary income.
- The tax treatment of a partial distribution from your non-Roth accounts depends on the account from which it is paid:
- A partial distribution from accounts other than your After-Tax Account is treated first as a distribution from your General Account tax-paid balance, and to that extent, is tax-free to you.
- Any remaining portion of a partial distribution from accounts other than your After-Tax Account is taxable as ordinary income.
- A partial distribution from your After-Tax Account is prorated between tax-paid and tax-deferred balances in that account.
Additional 10% tax if you are under age 59-1/2
An additional 10% tax applies to the taxable portion of most withdrawals/distributions you receive prior to the date you attain age 59-1/2. This tax does not apply to:
- Amounts paid after you separate from service during or after the year you reach age 55.
- Amounts paid after you retire due to disability (as defined under IRS rules).
- Amounts used to pay certain medical expenses.
- Amounts rolled over to an eligible plan or an IRA.
- ExxonMobil stock direct dividend payments.
- Amounts converted to the Roth Conversion Account at time of conversion.
5-year recapture for withdrawals/distributions from the Roth conversion account
When an in-plan Roth conversion occurs, the taxable amount at time of conversion is not subject to this additional 10% tax. However, if the amount converted is withdrawn or distributed within 5 calendar years from January 1 of the year of conversion, the taxable amount at time of conversion is treated as taxable at the time of withdrawal/distribution solely for this purpose. As a result, this additional 10% tax will apply to the taxable amount if you have not attained age 59-1/2 or do not satisfy any of the other exceptions as listed above.
You may defer taxation on the taxable portion of certain withdrawals/distributions from the non-Roth accounts by making a rollover to an eligible plan or an IRA. You may also defer taxation on the taxable portion of certain withdrawals/distributions from the Roth accounts by making a rollover to an eligible plan or a Roth IRA.
Generally, all withdrawals/distributions (taxable and non-taxable) may be rolled over into an eligible plan except:
- Hardship withdrawals.
- ExxonMobil stock direct dividend payments.
- Distributions to retirees required after attaining age 70-1/2 (minimum distributions).
- Loans declared in default and treated as taxable distributions.
Any eligible rollover amount paid to you (i.e., not made as a direct rollover) will be subject to 20% income tax withholding on the taxable amount to the extent of the cash received. No withholding is required on withdrawals/distributions consisting solely of ExxonMobil stock.
The total amount of the withdrawal/distribution (including the amount withheld) is still eligible to be rolled over to an eligible plan or IRA within 60 days from the date received. Any taxable amount that is not rolled over within the 60-day period must be included in taxable income and also may be subject to an additional 10% tax (explained above).
You may elect to have no income tax withheld on the taxable portion of an amount that is not eligible to be rolled over. If no election is made, withholding will be at 10%.
A lump-sum distribution has a specific meaning in the Internal Revenue Code. If a distribution is considered to be a lump sum, it is afforded special tax treatment. According to the Internal Revenue Code, a lump-sum distribution is a distribution, within one tax year, of your entire Savings Plan Account balance that is:
- Payable to you because you:
- Have reached age 59-1/2,
- Have separated from service, or
- Are disabled (as defined under IRS rules).
- Received by your beneficiary as a result of your death.
Generally, for a distribution to qualify as a lump-sum distribution, you must have been a participant in the Savings Plan for at least five years. In-plan Roth conversions, post-retirement withdrawals, partial distributions, minimum distributions, and Stock Match Account diversification distributions can prevent a future total distribution from being a lump-sum distribution.
In-plan Roth conversions
At the time of conversion, you will incur tax liability as if the converted assets were distributed to you. However, any ExxonMobil stock converted is taxed at fair market value and the additional 10% early withdrawal tax does not apply.
If the amount converted is withdrawn/distributed within 5 calendar years from January 1 of the year of conversion, the additional 10% tax may apply. See section titled "Additional 10% Tax if You Are Under Age 59-1/2" above.
There is no income tax withholding on the amount converted so you are responsible for estimating and paying the amount of tax owed. You may wish to discuss with a Savings Telephone Service (STS) Customer Service Representative at 1-877-XOM-401K (966-4015).
Special tax treatment for some eligible participants
Lump-sum distributions received by participants who have attained specified ages may be eligible for special tax treatment:
- Ten-Year Averaging – If you receive a lump-sum distribution and you were born before January 1, 1936, you may be able to make a one-time election to use ten-year averaging.
- Capital Gains Treatment – If you receive a lump-sum distribution and you are eligible for ten-year averaging (i.e., born before January 1, 1936), you may be able to use a flat 20% tax rate on the portion of your distribution (if any) attributable to Savings Plan participation before 1974.
These special tax elections may be made only once after 1985 and, if made, will apply to all lump-sum distributions received in the same year. If you would like more information about this special tax treatment, please contact a Customer Service Associate via the STS.
If you ever roll over any part of a withdrawal/distribution (other than any diversification distribution from your Stock Match Account), you may lose eligibility for this special tax treatment for any subsequent lump-sum distributions from the Savings Plan.
Surviving spouses, alternate payees and other beneficiaries
In general, the rules summarized previously that apply to distributions to employees also apply to distributions to beneficiaries of employees and retirees. These beneficiaries will receive additional tax information as necessary.
Net unrealized appreciation (NUA)
Net unrealized appreciation (NUA) is any increase between the cost of the ExxonMobil stock allocated to your account and the market value of the stock when it is withdrawn or distributed.
If your withdrawal or distribution includes ExxonMobil stock, you have an additional tax deferral opportunity and the opportunity for a portion of your taxable amount to be taxed at long-term capital gains tax rates rather than at ordinary income tax rates. Since capital gains tax rates are generally lower than ordinary income tax rates, this opportunity may help you keep more of your taxable account balance. Depending on the amount of NUA on the stock you take in a withdrawal or distribution, the difference between capital gains taxes and ordinary income taxes can be substantial.
If your withdrawal or distribution includes ExxonMobil stock, a value is assigned to that stock. The value is the lower of the cost of the stock or its market value at the time of withdrawal/distribution. Determining the taxable value of the stock based on its cost (if below market value) can result in the deferral of income tax on the NUA if the distribution qualifies as a lump sum distribution or the stock is attributable to your after-tax contributions. When you finally sell the stock, the NUA is taxed as long-term capital gain.
The fair market value of stock withdrawn or distributed from the Roth accounts in a qualified distribution is exempt from tax. In such cases, the ability to defer the amount of NUA is not relevant.
When you buy, or the company contributes, ExxonMobil stock, the purchase price is recorded for each individual share in your account. Records of these are grouped in one dollar increments.
Assume ExxonMobil stock was allocated to your non-Roth accounts with a cost basis of $1,000 but the stock was worth $1,200 when you received it. In this example you would not have to pay tax on the $200 increase in value (the NUA) until you later sell the stock if the shares were attributable to your after-tax contributions and you do not make a rollover, or if you received the shares in a lump-sum distribution. Also, once you sell these shares, taxes on the $200 NUA will be paid at long-term capital gains tax rates versus ordinary income tax rates.
Any appreciation in value after the date of withdrawal or distribution is taxed as either long-term or short-term capital gain, depending on the length of time you hold the stock outside the Savings Plan. You may, however, elect not to use this special rule for NUA in which case, the NUA will be taxed in the year you receive the stock unless you roll over the stock.
Participants who defer final distribution of their Savings Plan Account and who later receive a withdrawal or distribution or make an in-plan Roth conversion in a year prior to the year of total distribution may lose the special tax treatments and limit the NUA otherwise available to them.
Effects of lump-sum distribution
- Lump-sum distribution – If you receive ExxonMobil stock in a distribution that qualifies as a lump-sum distribution (or it would qualify except that you did not have five years of participation in the Savings Plan), you can exclude from current income the NUA on all stock received and not rolled over.
- Non lump-sum distribution – If you receive ExxonMobil stock in a withdrawal or a distribution that is not a lump-sum distribution and you do not make a rollover of any eligible portion, you can exclude from current income the NUA only on stock attributable to your after-tax contributions. If you choose to roll over any portion of the non lump-sum distribution, you will not be able to exclude NUA on any of the company stock in that withdrawal/distribution.
The opportunity to defer tax on the NUA in a distribution can be a valuable tax planning tool that can be lost by making withdrawals, partial distributions or in-plan Roth conversions after you terminate from employment or retire. Buying and selling ExxonMobil stock during your years as a participant, in an attempt to “time the market”, can also result in less potential NUA. As low cost shares are sold and then repurchased at a potentially higher value, the difference between the market value at distribution and the cost basis of the shares may narrow.
The tax-related information presented here provides only a general summary of the federal (not state or local) income tax laws in effect when this publication was produced that might apply to your withdrawals/distributions. The rules are complex and contain many conditions and exceptions that are not included in this material. Therefore, you should consult with your personal tax advisor before you make an in-plan Roth conversion or you take a withdrawal or distribution of your benefits from the Savings Plan.
These tax considerations may vary for Puerto Rico participants.