Distributions

Taxation
Distributions from qualified plans are taxed as income for the recipient in the year of
receipt.
Exceptions:
(a) Payments awarded to a non-spouse payee of a QDRO are taxed to the
participant rather than the recipient.
(b) De minimus amounts (under $10) is not taxed.
(c) Distribution on account of a 402(g) excess, if distributed timely, is taxable in
the year of failure.
(d) Roth conversions are taxed at time of conversion.
State tax is typically required also.
A 10% excise tax is imposed if the recipient is under age 59 , unless one of the
following conditions is met:
(a) Participant terminates employment after age 55.
(b) Distribution is due to the death of the participant
(c) Distribution after a participant becomes disabled. * (Must use Social Security
disability definition, not plan disability definition.)
(d) Distribution is the result of a corrective distribution.
(e) Distribution is the result of a QDRO.
(f) Distribution is used for medical expenses that exceed 7.5% of adjusted gross
income. *
* We may not be able to determine if a participant meets the requirements for the
excise tax exceptions. If this is the case, the 1099R is prepared assuming the
penalty is imposed and the payee has the ability to prove an exception applies
when they file their taxes.
These are excise tax rules for qualified plans. Slightly different rules apply to IRAs.
Sometimes it is beneficial to rollover prior to distribution because of this. The IRS
permits you to withdraw up to $10,000 from an IRA for a first time home purchase
without penalty. It is also permissible to withdraw IRA funds without penalty to pay for
higher education expenses for yourself, your spouse, your child or your grandchild.
A traditional rollover defers taxation until the money is withdrawn from the receiving
account. If a direct rollover is initiated, tax withholding is not required. The participant
could instead initiate a 60-day rollover. In this case, taxes must be withheld and the
participant would need to make-up the withholding in order to roll it over.

Distributions NOT eligible for rollover

a) Required Minimum Distributions
b) Hardship distributions
c) Deemed distribution of loans
d) Corrective distributions
e) PS-58 costs
f) Distributions made in periodic payments over the life expectancy of the
participant (Annuity/Installment payments)
10% federal tax withholding is mandatory if the distribution is not eligible for rollover.
Waiver of the withholding is permitted. Normal state taxation rules generally apply.
Distributions eligible for rollover
Any type of distribution not listed above.
20% withholding mandatory federal tax withholding. Waivers are not permitted.
In-Service Withdrawals
a) Profit Sharing Plan rules
i. Contributions must accrue in the plan for a minimum of 2 years
(seasoned money rule)
ii.
Participant has at least five years of participation
iii.
Plan-specified age, OR
iv.
Financial hardship (Does not need to satisfy 401(k) hardship
definition.)
v.
Full vesting is not required, but strongly recommended.
b) 401(k)/403(b) rules (pre-tax and Roth)
i. Age 59
ii. Financial hardship (IRS safe harbor definition)
c) Special 401(k) money types (Safe Harbor, QNECs and QMACs)
i. Age 59
d) Pension Plan rules (Money Purchase, Defined Benefit, Cash Balance, Target
Benefit) these rules apply to transferred/merged pension money as well.
i. Normal retirement age
ii. Age 62
e) Rollovers and after-tax money may be withdrawn at any time
Hardship Withdrawals
If the participant first exhausts all other means of withdrawing money from the plan (i.e.
in-service withdrawals or participant loans), then they may request a hardship withdrawal
for any of the following purposes:
(1) Purchase a primary residence, (2) Prevent eviction from primary residence, (3)
Post-secondary education (for the next 12 months) for self, dependents and
primary beneficiary, (4) Pay unreimbursed medical expenses for self, dependent
and primary beneficiary, (5) Funeral expenses for immediate family member or
primary beneficiary, and (6) Casualty damage to principal residence.
If a hardship is taken from Salary Deferral money, then the participant is not able to
contribute to the plan for a 6 month period following.

Required Minimum Distributions

Once a participant attains age 70 , the IRS requires them to begin withdrawing
contributions from their retirement accounts. (Deferred to the later of age 70 or
termination of employment for non-owners (5%) of a qualified plan)
A participants distribution is calculated by using the value of the account as of
the end of the calendar year prior to the distribution year.
If a participant is less than 100% vested, the total account balance is used for the
calculation, but the distribution amount cannot exceed the vested balance.
The minimum distribution factor is determined by the participants age at the end
of the distribution calendar year. The uniform life table is used unless the
participants spouse is the sole beneficiary and is more than 10 years younger than
the participant. Then the joint life table can be used to calculate.
The RMD must be the FIRST distribution withdrawn from the plan (prior to a
rollover.)
RMDs cannot be combined with other qualified plans. (IRAs can be combined
and withdrawn from one account.)
Special rules apply to distributions after participants death.
Failure to distribute a required minimum distribution is a plan failure. SCP may
be used to correct minimum distributions, but a VCP application is required in
order to receive a waiver of the 50% excise tax imposed on the participant.
Roth distribution rules
Roth money is taxed at the time it is contributed rather than the time that it is withdrawn.
The earnings on the Roth contributions are non-taxable upon distribution as long as they
are qualified distributions.
The same distribution rules apply to Roth deferrals as pre-tax deferrals. However to be a
Qualified distributions, they must meet two requirements:
i.
Made after the participant attains age 59 , becomes disabled or dies, and
ii.
Distribution made after the end of the 5-year period beginning with the
calendar year in which the participant first made a Roth deferral to the
plan.
Non-Qualified Distributions - The earnings on the distributions are taxable if the
distribution is Non-Qualified. If the entire account is not being distributed, then the
earnings and basis are prorated. If the participant is not age 59 , the taxable amount is
subject to 10% penalty tax.
Although permitted, we discourage plans from permitting hardship withdrawals from
Roth money due to the complicated nature of the administration.

Required States with Withholding Tax Applied

State
Withholding Amount
State Exclusions
Arkansas
California

3% of redemption amount

Eligible Rollover
Distributions
No withholding for gross 5% of redemption amount
distributions less than
$200.00
Not Applicable
Not Applicable

10% of federal income tax

amount
Delaware
5% of redemption amount Not Applicable
Not Applicable
unless W-4P is received
Iowa
5% of redemption amount No withholding for gross 5% of redemption amount
rounded to the nearest whole distributions less than
dollar
$3000.00
Kansas
5% of redemption amount No withholding for gross 5% of redemption amount
distributions less than
$200.00
Maine
5% of redemption amount Not Applicable
5% of redemption amount
rounded to the nearest whole
dollar
Massachusetts 5.3% of redemption amount Not Applicable
5.3% of redemption amount
unless M-4P is received
unless M-4P is received
Mississippi
5% of redemption amount State withholding
Not Applicable
rounded to the nearest whole applicable on only
dollar
Premature distributions
Maryland
Not required
Voluntary withholding 7.75% of redemption amount
except ERD's
Nebraska
5% of redemption amount IRC 408 plans (IRA,
5% of redemption amount
SEP, SIMPLE &
SARSEP)
North Carolina 4% of redemption amount No withholding for gross Not Applicable
rounded to the nearest whole distributions less than
dollar
$200.00
Oklahoma
5% of redemption amount Not Applicable
5% of redemption amount
rounded to the nearest whole
dollar
Oregon
8% of redemption amount $10.00 Minimum
Not Applicable
Vermont
2.7% of redemption amount No withholding for gross 5.4% of redemption amount
distributions less than
$200.00
Virginia
4% of redemption amount IRC 408 plans (IRA,
4% of redemption amount
SEP, SIMPLE &
SARSEP)