What Is a Nonperiodic Distribution?

A nonperiodic distribution is a one-time, lump-sum payment of a qualified retirement plan distribution.

Key Takeaways

  • A nonperiodic distribution involves a lump-sum or ad-hoc withdrawal from a retirement or qualified account.
  • This can be contrasted with periodic distributions received in retirement that are paid out on a regular basis for income.
  • Certain nonperiodic distributions may be subject to penalties and taxes due.

How Nonperiodic Distribution Works

Only taxable distributions that are taken in cash are subject to the withholding tax in nonperiodic distributions. The withholding rule is intended to discourage employees from withdrawing their retirement assets before they are retired. Periodic distributions would instead be paid monthly or annually.

Nonperiodic distributions paid directly to an employee may be subject to a 10% early-withdrawal penalty and any owed withholding tax unless the beneficiary elects to have no taxes withheld. Nonperiodic distributions do not include individual retirement account (IRA) transfers or rollovers, systematic withdrawals, or required minimum distributions (RMDs). A nonperiodic distribution may also be taken out penalty-free for certain qualified expenses, such as purchasing a first home.

Types of Retirement Accounts

Below are several types of retirement accounts:

  • Payroll deduction IRA: Even if an employer does not want to adopt a retirement plan, it can allow its employees to contribute to an IRA through payroll deductions, providing a simple and direct way for eligible employees to save.
  • Salary Reduction Simplified Employee Pension (SARSEP): This is a simplified employee pension (SEP) set up before 1997 that includes a salary reduction arrangement. Instead of establishing a separate retirement plan, in a SARSEP, employers make contributions to their own IRA and the IRAs of their employees, subject to certain percentages of pay and dollar limits.
  • SEP: They provide a simplified method for employers to make contributions to a retirement plan for their employees. Instead of establishing a profit-sharing or money purchase plan with a trust, employers can adopt a SEP agreement and make contributions directly to an individual retirement account or an individual retirement annuity established for each eligible employee.
  • SIMPLE IRA plan: These are tax-favored retirement plans that small employers, including self-employed individuals, can set up for the benefit of their employees, a SIMPLE IRA plan is a written salary reduction agreement between employee and employer that allows the employee, if eligible, to choose to have the employer contribute the salary reductions to a SIMPLE IRA on the employee's behalf.
  • 401(k): This defined contribution plan allows employee salary deferrals or employer contributions.
  • SIMPLE 401(k): This defined contribution plan is available to small business owners with 100 or fewer employees. An employee can elect to defer some compensation.  
  • 403b Tax-Sheltered Annuity Plan: These are annuity plans for certain public schools, colleges, universities, churches, public hospitals, and charitable entities deemed tax-exempt under Internal Revenue Code section 501c3.
  • Profit-Sharing Plan: This defined contribution plan allows discretionary annual employer contributions.
  • Money-Purchase Plan: In this defined contribution plan, employer contributions are fixed.
  • Defined-Benefit Plan: This is plan is funded primarily by the employer for which the contributions are actuarially determined.