QUALIFIED PLAN DISTRIBUTIONS

Distributions from IRS qualified plans are subject to various penalties dependent on specific situations, such as the participant's age, employment status, and size of their account. Generally speaking, the penalties are imposed for distributions that are;

1. Taken too soon;
2. Taken too late; or,
3. Too small.

What is the penalty for early distribution from a qualified plan?
Distributions from a qualified plan are subject to a 10% penalty unless:

1. The participant is over 59-1/2;
2. It is made as a result of death or disability;
3. It is made as part of a Qualified Domestic Relations Order (QDRO);
4. The participant terminates employment after age 55; or,
5. Distributions are made in a series of periodic payments paid over the participant's life expectancy or the joint life expectancy of participant and beneficiary, beginning after separation from service.

This penalty can be avoided by either rolling the distribution into another qualified plan or into a Rollover IRA. For more on Rollover IRA's click here

Life Expectancy tables are called "Uniform Distribution" tables. For the Single Life Expectancy Table for Inherited IRAs click here or for the IRA Owner or Plan Participant table click here or for the Joint and Last Survivor Table click here

What are the minimum distribution requirements?
A participant in a qualified plan must begin taking distribution no later than the April 1 following the year in which they reach age 70-1/2. The minimum amount is determined based on life expectancy tables. The penalty is 50% of the difference between the required minimum amount and the amount actually taken. An important point to remember is that if you wait until April 1st of the following year, that distribution must be taken by December 31 of that year. The minimum distribution rule applies to IRA and SEP accounts as well as qualified plans.

What if the participant has after-tax dollars in his or her account?
Both lump-sum distribution and periodic payments are taxed as ordinary income except for any distribution attributable to voluntary, non-deductible contributions. For distributions of pre-1987 after tax voluntary contributions, the recovery of such contributions can be made before the pre-tax dollars are deemed to be distributed. For post-1986 voluntary contributions, any distribution must include both pre-tax and voluntary contributions in proportion to the total account.

What is considered a lump-sum distribution?
A distribution from a qualified pension plan or profit sharing plan made within one taxable year, on account of the employee's death, disability, separation from service or attainment of age 59-1/2. A distribution unless the employee was a plan participant for at least five years (This does not apply to a beneficiary receiving a distribution as a result of the participant's death). The tax options are;

1. Treat as ordinary income;
2. Elect five year forward averaging;
3. Elect forward averaging on post 1973 amount with pre-1974 amount being treated as long-term capital gain; and,
4. Roll all or part of the distribution over to a Rollover IRA or another qualified plan; no tax is paid on the amount rolled over and the rest is taxed as ordinary income without the availability of electing forward averaging.

If an individual attained age 50 prior to January 1, 1986, he or she can elect special ten year forward averaging.