Retirement and College Savings Plans - Distribution/Withdrawl Rules

Withdrawals From Qualified Retirement Plans
The taxation of withdrawals are similar to those from an IRA. Withdrawals prior to reaching the age of 59.5, are subject to a 10% tax penalty, as well as ordinary income taxes. There are some exceptions to that 10% penalty:

  • The taxpayer becomes disabled.
  • The employee retires after attaining age 55 (this exception applies only to withdrawals from the current company's plan - not previous employer plans or IRAs).
  • Withdrawals are made in case of divorce, as part of a QDRO (Qualified Domestic Relations Order).
  • The beneficiary withdraws funds from the plan after the employee's death.
  • The employee needs money to cover medical expenses that are in excess of 7.5% of adjusted gross income.
  • Withdrawals are made in a series of substantially equal periodic payments (SEPP) over the owner's life expectancy.

Funds in a qualified retirement plan may be transferred or rolled over to another retirement plan or IRA without taxation. In the case of a direct transfer or direct rollover, the money is sent directly from the custodian of the plan to the custodian of the new plan. No income taxes are withheld. However, if the employee withdraws the funds directly, there is a mandatory 20% income tax withholding. So if the employee chooses to roll the funds over to another plan, he or she will either have to find the money to deposit that additional 20% , or will have to pay taxes (and penalty if under the age of 59.5) on the 20% that was not rolled over.

Required Minimum Distribution Rules
The IRS requires distributions to begin from qualified plans (and IRAs) by the Apr 1 of the year following your attainment of age 70.5 . The only exception to this requirement is for those who are still working and the exception applies only to the current employer's plan (not previous employer plans or IRAs). The amount that must be withdrawn is calculated by dividing the account balance by a life expectancy factor. A 50% tax penalty applies to amounts that should have been withdrawn but were not.

Nonqualified Employer-Sponsored Retirement Plans
Related Articles
  1. Term

    Understanding the Maintenance Margin

    A maintenance margin is the minimum amount of equity that must be kept in a margin account.
  2. Investing Basics

    Brokers and RIAs: One and the Same?

    Brokers and registered investment advisors have some key differences. Here's what you need to know.
  3. Professionals

    Is a Google Robo-Advisor on the Horizon?

    It's possible that Google is looking to get into the robo-advisor business, either as a new venture or as a way to provide more benefits to employees.
  4. Professionals

    Understanding Series 6

    Upon successful completion of the Series 6, an individual will have the qualifications needed to sell open end mutual funds and variable annuities
  5. Professionals

    Top Strategies on How to Become a Stock Broker

    Gunning to be a stock broker and want an edge? Here's some veteran advice.
  6. Trading Systems & Software

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  7. Professionals

    Understanding Series 63

    Series 63 is a securities license that entitles the holder to sell securities in a particular state.
  8. Professionals

    How To Answer Option Questions On The Series 7 Exam

    Learn how to answer option questions on the Series 7 exam. Pass your Series 7 exam with the help of these tips.
  9. Investing Basics

    Online Portfolio Management, DIY or Fee-Based Financial Advisor: Which Is Right For You?

    Should you use an online financial planning service, or do professional, fee-based financial planners justify their higher costs?
  10. Insurance

    Municipal Bond Tips For The Series 7 Exam

    Learn to distinguish between general obligation and revenue bonds to ace this test.
RELATED TERMS
  1. Series 6

    A securities license entitling the holder to register as a limited ...
  2. Comprehensive Automated Risk Data ...

    The Comprehensive Automated Risk Data System (CARDS) is an initiative ...
  3. Corporate Financing Committee

    A regulatory group that reviews documentation that is submitted ...
  4. Series 79

    A examination to ensure a candidate is qualified to become a ...
  5. Research Analyst

    A person who prepares investigative reports on equity securities. ...
  6. Series 34

    An exam required for individuals seeking to engage in off-exchange ...
RELATED FAQS
  1. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
  2. What are some of the major regulatory agencies responsible for overseeing financial ...

    There are a number of agencies assigned to regulate and oversee financial institutions and financial markets, including the ... Read Full Answer >>
  3. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

    The Nasdaq became the world's first electronic stock exchange at its inception in 1971. The exchange's dedication to advancing ... Read Full Answer >>
  4. How are margin calls regulated by the SEC?

    The Federal Reserve Board and the Financial Industry Regulatory Authority (FINRA), not the Securities and Exchange Commission ... Read Full Answer >>
  5. If I have only a limited amount of time to study for the Series 6, what should I ...

    The Series 6 Investment Company and Variable Contracts Products Representative Qualification Examination is administered ... Read Full Answer >>
  6. How does an underwriter syndicate work together on an initial public offering (IPO)?

    An underwriting syndicate is a group of investment banks that share the responsibility of marketing the shares of a company ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!