Series 6

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 The amount that must be withdrawn is calculated by dividing the account balance by a life expectancy factor. A 50% tax penalty applies to amounts that should have been withdrawn but were not.


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