Pre Retirement Distributions Flashcards
What generally happens to early distributions from qualified plans?
They are not permitted, but certain circumstances allow taxable distributions with potential penalties.
Circumstances include death, disability, termination, and hardship withdrawals.
What occurs to benefits upon the death of a plan participant?
Benefits usually become fully vested and payable to the designated beneficiary.
This is a standard provision in most retirement plans.
What happens to retirement plan benefits if a participant becomes disabled?
Benefits typically become fully vested and payable under the plan provisions once the participant satisfies the definition of disabled.
Disability is often defined as meeting the Social Security definition.
What distribution options are available upon termination from a qualified plan?
- Vested portion distribution (subject to withholding and tax penalties)
- Rollover into an IRA or new employer’s plan
- Lump sum
- Installments
- Stock or cash
- Annuity
Lump sum is the most common option.
What is an in-service withdrawal?
It allows participants to access retirement funds while still employed, subject to IRS regulations and employer plan design.
Specific rules may vary based on the plan.
What are hardship withdrawal safe harbors in defined contribution plans?
- Medical expenses for unreimbursed care
- Down payment and closing costs on a primary residence
- Education expenses for post-secondary education
- Payments to prevent eviction or foreclosure
- Funeral expenses
- Casualty repairs for damage to the principal residence
These are specific conditions under which early distributions may be allowed.
What must a participant show to qualify for a hardship withdrawal?
- The distribution does not exceed the amount required to meet the need
- The need cannot be met from other reasonably available resources
These criteria help ensure that hardship withdrawals are justified.
What is the penalty for a hardship withdrawal?
A participant is suspended from making elective contributions for six months following a hardship distribution.
This is a measure to prevent abuse of hardship withdrawals.
At what age can most plans allow active employees to access their retirement funds?
Age 59½.
This age is a common threshold for accessing retirement funds without penalties.
What should employees do with rollover balances from previous employers?
They are encouraged to roll them over into new retirement plans.
This helps in maintaining tax advantages and consolidating retirement savings.
In regard to tax on retirement distributions, when do the distributions become taxable?
When the employee takes the distribution during retirement or text
Early distributions from retirement plans and a 10% penalty tax - what are exceptions to the 10% penalty?
Distributions over the age of 59 1/2
Death of participant
Medical expenses over 7 1/2% of adjusted gross income
Disability
Termination after age 55
Alternate payee under qualified domestic relations order QDRO
What age are participants required to take the minimum distribution?
72
What percentage of excise tax is made on distributions not taken before age 72(minimum distribution age)
50%
Is the minimum distribution required after age 72 if the employee is still working?
Minimum distribution is mandatory whether the owner is working or retired
If an employee fails to make a distribution election and the account balance is $1000 or less what is the employers obligation?
An employer can require employees to take a distribution if the employee fails to make a distribution election
If an employee fails to make a distribution election with an account balance of 1000 to 5000 what’s the employers’s obligation?
An employer must automatically roll over the account into an IRA selected by the plan administrator unless the plan participant affirmatively elects to receive the cash or select a different IRA account
Roll over withholding rules require plan contributions to be rolled over directly into another qualified plan or IRA. If the contributions are not rolled over, what is the percentage of withholding requirement?
A 20% federal withholding requirement applies to contributions not rolled over to qualify account
Under roll over withholding rules can a plan participant elect to split distributions, taking a portion in a lump sum and rolling over the rest?
The participant may retain a portion of a distribution and roll over the remainder into a qualified IRA. The cash portion of the distribution carries a 20% penalty.
If an employer plans a full distribution of retirement plan contributions how many days in advance is written notice required
Written notice is required at least 30 days prior and no more than 180 days prior to the distribution
The employee may waive the 30 day notice requirement to receive the distribution
What are exceptions to the withholding requirement?
A participant receiving required minimum distributions
Non-taxable distributions
Return of access, referrals, or contributions
Deemed distributions for defaulted plan loans
Hardship distributions
Not all retirement plans allow loans for those plans that do allow loans. What’s the maximum allowed?
The maximum allowed is the lesser of 50,000 less the highest outstanding loan balance in the proceeding 12 months(look back rule)
50% of the best that accounts balance
What should the interest rate be on a retirement plan loan?
The interest rate charge should be the same as the rate for a comparable loan in the local lending market
When is repayment required in regard to a retirement plan loan
What’s the tax treatment on loan repayment?
Repayment is required within five years unless the loan was for a purchase of a primary residence
All loan repayment are made after tax basis
