Distribution Rules
In general
If you have funds in an IRA or an employer-sponsored retirement plan, you will probably be withdrawing those funds at some point. A withdrawal from an IRA or retirement plan is generally referred to as a distribution. The timing and amount of your distributions can have a significant impact on your tax liabilities, your retirement needs, and your estate planning. To make informed decisions, one of your first steps should be to familiarize yourself with the rules surrounding distributions.
There are two major IRS rules that govern distributions from IRAs and employer-sponsored retirement plans: the premature distribution rule and the required minimum distribution (RMD) rule.
The premature distribution rule encourages IRA owners and retirement plan participants to wait until age 59½ or later to begin taking distributions by imposing a penalty for distributions before age 59½.
The required minimum distribution rule requires IRA owners and plan participants to start taking annual distributions at some point, usually soon after reaching age 73 (75 for those who reach age 73 after December 31, 2032).
Distributions from employer-sponsored retirement plans are generally governed by the individual plan's provisions as well as the IRS distribution rules. If you participate in an employer-sponsored retirement plan and wish to take a distribution, you should first consult your plan administrator or review your summary plan description (SPD).
Premature distribution rule
Under the premature distribution rule, a 10% federal penalty tax is generally assessed on distributions taken from IRAs and employer-sponsored retirement plans prior to age 59½ (unless an exception applies). The penalty tax is assessed on the taxable portion of an IRA or plan distribution, and is in addition to regular federal and state income tax. There are a number of exceptions to the penalty tax, however. If you are under age 59½ and are considering withdrawing funds from your IRA or retirement plan, consult a tax professional regarding your particular situation.
The premature distribution penalty does not apply to qualified distributions from a Roth IRA, or from a Roth 401(k)/403(b)/457(b) account. However, if you receive a nonqualified distribution from a Roth account prior to age 59½, any taxable earnings you receive will be subject to the premature penalty tax unless an exception applies. In addition, the tax does not apply if you convert funds from a traditional IRA to a Roth IRA, roll over non-Roth funds from an employer retirement plan to a Roth IRA, or make a 401(k)/403(b)/457(b) in-plan Roth conversion. However, if you make a Roth conversion, and then take a nonqualified distribution from that Roth IRA or Roth account prior to age 59½ and within five tax years of the conversion or rollover, the penalty tax will retroactively apply to the entire amount that was taxed at the time of the conversion.
The premature distribution penalty applicable to distributions from a SIMPLE IRA plan during your first two years of participation is 25%, rather than 10%.
The premature distribution penalty generally doesn't apply to distributions from governmental section 457(b) plans.
Required minimum distribution rule
Under the required minimum distribution (RMD) rule, you must begin taking minimum annual distributions from your traditional IRA or employer-sponsored retirement plan. In most cases, the first required distribution must be taken no later than April 1 following the calendar year in which you reach age 73 (75 for those who reach age 73 after December 31, 2032). In the case of an employer-sponsored retirement plan, if you work past age 73, the first required distribution is generally April 1 following the calendar year in which you retire. The annual minimum distributions are generally calculated based on IRS life expectancy tables. You can always withdraw more than the required minimum in any year if you wish, but if you withdraw less than required, you will be subject to a 25% federal penalty tax on the undistributed amount (reduced to 10% if the mistake is corrected in a timely manner).
Roth IRAs are subject to special rules — you are not required to take any minimum distributions from your Roth IRAs or work-based accounts during your lifetime.
If you work past age 73 and you own no more than 5% of the company you work for, you may not have to take RMDs from your current employer's 401(k) plan. You will still need to take RMDs from other plans, however.
