Section 1165(l) of the former Puerto Rico Internal Revenue Code set the tax rules for distributions from qualified retirement and profit-sharing plans. When Puerto Rico rewrote its tax code in 2011, those rules moved to Section 1081.01 of the new Internal Revenue Code, and that is the citation you will see on current forms and government guidance. The exemptions people still associate with the old Puerto Rico tax code 1165(l) carried over intact: up to $11,000 of the taxable portion of a qualified plan distribution is exempt each year if you are under 60, and up to $15,000 if you are 60 or older. Plan documents, older tax guides, and some professionals still say “1165” or “1165(l)”; your return and your Form 480.7C will say “1081.01.” They point at the same body of rules.
Where Section 1165(l) Lives in the Code Today
Puerto Rico adopted a new Internal Revenue Code in 2011 and reorganized much of the old statute in the process. The qualified retirement plan provisions that lived in Section 1165 were carried into Section 1081.01 of the 2011 code. Form 480.7C, the informative return your plan administrator issues for retirement and annuity distributions, references Section 1081.01 as the governing provision for both qualified and non-qualified plans.1Department of the Treasury (Puerto Rico). Form 480.7C – Informative Return – Retirement Plans and Annuities
If a plan document, an advisor, or an older IRS publication cites “Section 1165” or “Section 1165(l),” treat it as a historical reference to the same rules now codified in Section 1081.01. Nothing about the substance has changed in a way that lets you ignore the renumbering; the current citation is what you use on a filing.
How Your Distribution Is Taxed
A distribution from a Puerto Rico qualified plan splits into two pieces. The portion that represents your own after-tax contributions comes back to you tax-free, because you paid tax on those dollars when you earned them. The employer’s contributions and any investment gains the trust accumulated are the taxable portion.
On that taxable portion, Puerto Rico gives you an annual exemption. The first $11,000 is exempt if you are under 60. The first $15,000 is exempt if you are 60 or older. Everything above the applicable ceiling is taxed at ordinary income rates. The exemption applies per taxable year, not per distribution, so if you take two or three withdrawals in the same year they share one ceiling.
Lump-Sum Distributions
If you take a total distribution rather than periodic payments, a flat rate applies instead of ordinary rates. The standard rate on a lump sum is 20 percent, provided the plan met its withholding and deposit requirements. A preferential 10 percent rate is available when two conditions are both met: the trust is organized under Puerto Rico law or uses a Puerto Rico-resident trustee as paying agent, and at least 10 percent of the trust assets attributable to Puerto Rico-resident participants are invested in property located in Puerto Rico.
Act 65-2025 made changes affecting certain lump-sum distributions from qualified plans for tax years beginning after December 31, 2024. If you are taking a large payout in 2025 or later, confirm the current treatment with the Department of the Treasury or a qualified tax professional before you authorize the distribution.
Rolling Over Without Triggering Tax
Puerto Rico allows tax-deferred rollovers, but the destination account has to be the right type. An eligible rollover distribution from a Puerto Rico qualified trust can move tax-free into another eligible retirement plan under the Puerto Rico Tax Code. In practice, that means another Puerto Rico qualified employer plan or a Puerto Rico IRA.
There is no such thing as a dual-qualified IRA. A U.S. IRA and a Puerto Rico IRA are separate creatures under separate tax codes. Moving money between a U.S. IRA and a Puerto Rico IRA, or between a dual-qualified employer plan and an IRA on either side, does not qualify for tax-deferred treatment. If you attempt that kind of transfer, the distribution will likely be treated as taxable income in the year you received it, and the exemption cap above is all the shelter you get. Before any rollover that crosses the Puerto Rico/U.S. boundary, get professional advice; this is the single most expensive mistake people make with these accounts.
Reporting the Distribution
Form 480.7C
Your plan administrator or the institution holding the trust issues Form 480.7C, the Informative Return for Retirement Plans and Annuities. It reports the gross amount distributed, the taxable portion, and any taxes withheld, along with the plan’s identification number.1Department of the Treasury (Puerto Rico). Form 480.7C – Informative Return – Retirement Plans and Annuities The form uses letter codes to identify the type of distribution, and administrators can report up to two codes per distribution.2Department of the Treasury (Puerto Rico). Publication 24-03 Developer Guide Informative Returns Electronic Filing Requirements Check that the code matches your situation and that the gross and taxable figures match your own records. Coding errors are a common trigger for automated review and can freeze a refund until the discrepancy is resolved.
Filing Through SURI
Puerto Rico requires individual income tax returns to be filed electronically through SURI (Sistema Unificado de Rentas Internas), the Internal Revenue Integrated System, or through a certified tax preparation program.3Department of the Treasury (Puerto Rico). Instructions Booklet – Individual Income Tax Return Log into your SURI account, select the individual income tax return for the right year, attach digital copies of Form 480.7C and any other informative returns, and enter the exempt income amounts on the appropriate schedules. Confirm that the Section 1081.01 exemption appears correctly on the summary screen before you submit. SURI generates a confirmation receipt once you authorize transmission; save or print it as your proof of filing.
If You Live on the Mainland
The exemptions above are Puerto Rico’s territorial tax rules. If you are a bona fide resident of Puerto Rico, you can generally exclude Puerto Rico-source income from your U.S. federal return under 26 U.S.C. ยง 933,4Office of the Law Revision Counsel. 26 U.S. Code 933 – Income From Sources Within Puerto Rico so a qualified plan distribution that qualifies as Puerto Rico-source income is not also taxed federally.
Move to the mainland and the picture changes. U.S. citizens and resident aliens living stateside report worldwide income on Form 1040, and Puerto Rico is not a foreign country for treaty purposes, so no treaty exclusion applies. IRS Publication 570 sources pension income based on where you performed the services that earned the pension (for the contribution portion) and where the trust making the distribution is located (for the investment earnings portion).5Internal Revenue Service. Publication 570 (2025), Tax Guide for Individuals With Income From U.S. Territories If you pay Puerto Rico tax on the same income, you may be able to claim a credit on your federal return to avoid double taxation. The mechanics depend on your facts and your filing method.
Mistakes That Cost Money
Three errors come up repeatedly with Section 1081.01 distributions.
The most expensive is a botched cross-jurisdictional rollover. People assume money can move freely between a U.S. retirement account and a Puerto Rico one because both are American. It cannot. A failed rollover of this kind turns a tax-free transfer into a fully taxable event, sometimes on both sides of the line.
The second is treating the $11,000 or $15,000 exemption as a per-distribution figure. It is a per-year cap. Taking multiple partial withdrawals in the same calendar year does not multiply the exemption. And because the exemption only applies to the taxable portion, you need to know your cost basis in the plan to calculate it correctly.
The third catches people who move from Puerto Rico to the mainland and keep treating their plan distributions as exempt from federal tax. Once you lose bona fide resident status, the Section 933 exclusion no longer shields the income, and the taxable portion becomes reportable on your federal return. The year you move is the hardest one: you may need to file in both jurisdictions and allocate income between them.