RPF M3 U1 Distribution Process Flashcards
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What is the distribution process?
The distribution process involves determining whether a participant can withdraw money from their retirement account, how much can be withdrawn, and the tax implications of the withdrawal.
What is a distributable event?
A distributable event is an event that gives a participant or beneficiary the right to receive a distribution from the plan.
What is Normal Retirement Age (NRA)?
Normal Retirement Age (NRA) is the age at which participants must become fully vested in their account balances and be eligible to begin receiving distributions.
What triggers a participant’s ability to take money out?
Participants can take money out upon reaching Normal Retirement Age, termination of the plan, or other specific events defined by the plan document.
What are some examples of distributable events?
Examples include death, disability, termination, layoff, resignation, domestic abuse, terminal illness, and birth or adoption of a child.
What considerations must be made before a distribution occurs?
Considerations include whether the law allows for a distribution, if the plan permits it, and if the participant’s request meets the plan’s requirements.
How is the amount of the distribution calculated?
The amount available for distribution is based on the participant’s account balance and any applicable restrictions.
What payment types are available for distributions?
Payment types include lump sum, partial distribution, installment payments, and annuities.
What is the difference between a distribution and a withdrawal?
A distribution refers to the plan distributing assets to the participant, while a withdrawal refers to the participant taking assets from the plan.
What amount of the distribution is reported as taxable income?
Taxable income includes earnings from pre-tax contributions, while after-tax contributions are not taxed again.
What is the 20% withholding rule?
A mandatory 20% federal withholding tax applies on distributions over $200 from qualified plans if the amount is eligible for rollover but is paid directly to the participant.
What happens if a participant is not fully vested?
If a participant is not fully vested, the nonvested portion of their account is forfeited and returned to the plan.
What is a rollover?
A rollover is a plan distribution that is transferred to another retirement account or Individual Retirement Account (IRA).
What is the role of the plan document in distributions?
The plan document determines when a participant can withdraw funds and the forms of payment available.
What is the significance of vesting restrictions?
Vesting restrictions affect how much of a participant’s account balance is available for distribution based on the vesting schedule.
What are the tax implications of after-tax contributions?
After-tax contributions are reported as taxable income at the time they are made; the basis is not taxed again, but earnings are.
What is the tax reporting form for distributions?
The gross distribution and taxable income are reported on the 1099-R form provided to the participant at distribution.
What is the withholding rate for non-eligible rollover distributions?
A 10% withholding applies and may be waived by the participant. If the amount of the distribution is $200 or less, withholding is not required.
What happens to Emeril’s distribution of $100,000 under mandatory withholding rules?
Emeril would receive a check for $80,000, and the plan would make a $20,000 federal income tax deposit to the IRS. The $100,000 would be reported as taxable income.
What is defined as a premature distribution?
Any withdrawal from a retirement plan before age 59½ is defined as an ‘early’ or ‘premature’ distribution.
What additional tax is imposed on premature distributions?
The IRS imposes a 10% additional tax, often referred to as a penalty, in addition to any ordinary income taxes.
What are the exceptions to the 10% premature distribution additional tax?
Exceptions include distributions made upon death, disability, emergency distributions, terminal illness, domestic abuse, qualified disaster, for birth or adoption expenses, and other termination of employment after age 55.
What can a participant do with an eligible rollover distribution?
The participant can roll over the account to another qualified plan (including an IRA) within 60 days to avoid the distribution being reported as taxable income.
What must Emeril do to avoid the $100,000 distribution being taxable?
Emeril must initiate a 60-day rollover by depositing the total amount into an IRA and report it on his personal tax return.
