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 The amount that must be withdrawn is calculated by dividing the account balance by a life expectancy factor. A 50% tax penalty applies to amounts that should have been withdrawn but were not.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

    The Basics of The Series 79 Exam

    Passing the Series 79 exam is usually necessary for anyone who wants to work in investment banking.
  2. Your Clients

    Events in 2016 That'll Alter Your Retirement Plans

    Retirement savers who are trying to see what lies ahead can expect these changes affecting their retirement plans in 2016.
  3. Term

    What is the Series 66?

    The Series 66 exam is one of two tests required to register as both a securities agent and an investment advisor.
  4. Your Practice

    How Likely is a New Fiduciary Rule in 2016?

    New fiduciary standards for advisors working with retirement accounts are on the horizon. Will they become reality in 2016?
  5. Professionals

    Breaking Down Financial Securities Licenses

    Find out which exam you need to begin your career as an investment professional.
  6. Brokers

    Duck These Illegal Sales Tactics Used By Brokers

    Many unscrupulous brokers employ illegal swindling tactics to sell bad securities. Here are sales strategies that should indicate red flags to investors.
  7. Professionals

    Private Banker: Career Path & Qualifications

    Discover what kind of work private bankers do, and learn more about how you can develop the experience and qualifications required to work in the field.
  8. Financial Advisors

    Top Compliance Headaches for Financial Advisors

    Advisors who do not devote sufficient attention to compliance issues can find themselves in hot water with both regulators and their clients.
  9. Investing Basics

    How To Handle A Serious Dispute With Your Broker

    Find out what to do if you have a dispute with your broker.
  10. Professionals

    Hedge Funds and the Law

    Learn how hedge funds have gotten in trouble for illegal insider trading. Read about questionable high-frequency trading (HFT) strategies.
RELATED TERMS
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Series 6

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

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

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

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

    A person who prepares investigative reports on equity securities. ...
RELATED FAQS
  1. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  2. Are variable annuities safe?

    As of October 2015, many life insurance companies, and those companies that sell variable annuities, have experienced economic ... Read Full Answer >>
  3. How are variable annuities regulated?

    The sale of a variable annuity is regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory ... Read Full Answer >>
  4. Do financial advisors need to pass the Series 7 exam?

    The exact nature of a financial advisor's job responsibilities determines whether he must have a Series 7 license. If a financial ... Read Full Answer >>
  5. Is a financial advisor required to have a degree?

    Financial advisors are not required to have university degrees. However, they are required to pass certain exams administered ... Read Full Answer >>
  6. Do financial advisors need to be approved by FINRA?

    The term "financial advisor" can refer to a couple of different roles. It most often refers to a broker-dealer or an investment ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center