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Learn more about making the right retirement plan distribution decision
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Common questions and answers about retirement plan distributions
Common questions about retirement plan distributions
- What is an IRA rollover?
- What type of distribution can be rolled over to an IRA?
- What is a lump-sum distribution?
- Can I invest in more than one IRA?
- What if I want to roll over part of my distribution and keep part for immediate use?
- What are the advantages of placing a qualified distribution into an IRA rollover?
- What are the tax reporting requirements related to rolling over my qualified plan distribution?
- What happens to the voluntary after-tax contributions I've made to my employer's plan?
- Is it possible to combine my distribution with another IRA I already have?
- Can I elect a rollover to an IRA even after the age of 70 1/2?
- What is the tax status of a distribution from an IRA?
- What are my IRA distribution options?
- What are the mandatory distribution rules and how do I calculate these distributions?
- Are there restrictions on who can be named as beneficiary?
- What will happen to my IRA when I die?
What is an IRA rollover?
An IRA rollover is a tax-sheltered means for retirement benefits received from an employer-sponsored plan. For purposes of the information provided here, all references to IRA are traditional IRA. Any reference to a Roth IRA will be specified as such. Current taxes are deferred and all dividends, interest and gains are tax exempt until withdrawn. Because the assets in an IRA rollover are untaxed dollars, they compound tax free and grow more rapidly than money placed in a taxable account.
What type of distribution can be rolled over to an IRA?
To be eligible for placement in an IRA rollover, the distribution must be considered an "eligible rollover distribution." An eligible rollover distribution must meet the following criteria:
1. It must be paid from a qualified plan. Qualified plans include:
- Pension plans,
- Profit sharing plans,
- 401(k) plans,
- Employee stock ownership plans and
- Keogh plans (pension or profit sharing plan for self-employed persons).
Distributions from 403(b) plans established for teachers, hospital employees and other employees of non-profit organizations may also be eligible for rollover treatment.
2. The payment must not be made in any of the following forms:
- One of a series of substantially equal payments based on life expectancy,
- One of a series of installment payments payable over 10 years or more,
- All or part of a required minimum distribution,
- A return of either after-tax or voluntary non-deductible contributions,
- A return of any excess deferrals or excess contributions, a refund of life insurance costs, or as a deemed distribution due to a loan default or
- A hardship distribution.
What is a lump-sum distribution?
It is a payment or payments (within one calendar year) from a pension or profit sharing plan. It represents all contributions made by you or your employer, as well as all earnings.
Can I invest in more than one IRA?
You can have as many accounts as you like. One of the benefits of the Raymond James Self-Directed IRA, however, is the wide range of investments available.
What if I want to roll over part of my distribution and keep part for immediate use?
You may roll over any part of your lump-sum distribution and keep the rest. However, 20% of what you don't transfer directly into an IRA rollover will be withheld against taxes. If you have a $10,000 distribution and you do a direct rollover of $9,000, then $200 (20% of the $1,000 you didn’t roll over) will be withheld.
What are the advantages of placing a qualified distribution into an IRA rollover?
Placing an eligible distribution into an IRA is the only way to avoid current taxes, and perhaps a 10% penalty tax as well. Rolling over your distribution will allow the full value of your accumulated benefits to continue to grow and be available for your retirement years.
What are the tax reporting requirements related to rolling over my qualified plan distribution?
Under current regulations, there are no special tax forms to file when rolling over a qualified distribution to an IRA.
Soon after the end of the year in which you receive the distribution, the trustee of your employer's plan will send a Form 1099-R to the IRS and forward a copy to you. The 1099-R indicates the amount of your distribution. This amount is entered on your income tax return (IRS Form 1040). If you elected a direct rollover of the total distribution into an IRA, it is excluded from total taxable income. (If you do not roll over the full distribution, the part that you keep will be included in your taxable income for the year.) Once the rollover is completed, current law does not require any other IRS filings or reports.
What happens to the voluntary after-tax contributions I’ve made to my employer’s plan?
If you made voluntary after-tax contributions to your employer’s retirement plan, the dollar amount of the contribution is returned to you tax free and cannot be included in the amount you place in an IRA. You may want to open a separate investment account to hold these after-tax contributions.
Is it possible to combine my distribution with another IRA I already have?
Eligible distributions placed in an IRA rollover retain "portability." Portability allows you, at any time in the future, to return the amount in your IRA rollover into another employer-sponsored pension or profit sharing plan in which you participate and which provides for such transfers.
Portability is forfeited if assets from such a distribution are commingled with regular IRA contributions. However, if portability is not a concern, consolidation of your existing IRAs and your rollover distribution into a single account may simplify recordkeeping and provide additional investment flexibility.
Can I elect a rollover to an IRA even after the age of 70½?
There are no age restrictions for electing an IRA rollover. But by April 1 of the year following the year in which you reach age 70½, you must begin to make withdrawals (which cannot be rolled over).
What is the tax status of a distribution from an IRA?
Distributions from your IRA will be taxed as ordinary income in the year received, and may be subject to premature withdrawal penalties.
What are my IRA distribution options?
IRS rules govern when these assets can be removed from your IRA without penalty. Between the ages of 59 1/2 and 70 1/2, you may withdraw as much or as little from your IRA as you choose. The standard rule is that if you take an IRA distribution before you reach age 59 1/2, the amount distributed is subject to an additional 10% penalty tax.
The Tax Reform Act of 1986 adopted an early withdrawal program that allows a person to withdraw from an IRA prior to age 59 1/2 without penalty. You can withdraw money out of an IRA before 59 1/2 if you receive distributions as part of a series of equal payments based on your life expectancy. The payments must continue for at least five years or until you are 59 1/2, whichever is longer. For example, if you are age 57, you can begin a series of annual payments but you cannot alter the payment schedule or stop it until you are 62. If you begin withdrawals when you are 52, you cannot alter or stop the withdrawal schedule until you are 59½.
Beginning with the year you turn age 70 1/2, certain minimum distributions must be taken at least annually from your IRA to avoid substantial penalty taxes.
The IRS penalty for not taking the required minimum distributions from your IRA after age 70 1/2 is 50% of the difference between the amount that should have been distributed and the amount actually distributed from the IRA. You should also be aware that you may be required to make estimated tax payments whether or not you request the standard 10% withholding on distributions from your IRA.
What are the mandatory distribution rules and how do I calculate these distributions?
IRS regulations require you to take distribution of a certain minimum amount from your IRA every year after age 70½.
You must begin receiving minimum annual distributions no later than the April 1 of the year after you attain age 70½. Subsequent distributions must be made by the end of each succeeding year.
EXAMPLE: If your birthdate is November 3, 1933, you will be age 70½ on May 3, 2004. You may defer your first distribution until April 1, 2005. Your second distribution must be made by December 31, 2005.
This minimum amount is calculated using either a uniform single or joint life expectancy factor, if available, and the market value of the IRA. You are free to take more than the minimum amount, but if you take less than the required minimum, you will be liable for substantial penalty tax - 50% of the difference between the amount that should have been distributed and the amount actually distributed from the IRA.
The annual distribution is calculated by dividing the value of your account at the beginning of the year by the life expectancy factor. For example, if the account balance at the beginning of the year is $200,000 and the uniform single life expectancy of an individual at age 70 is 27.4 years, the distribution that must be made is $7,299.27 ($200,000 divided by 27.4). For the following year, the balance of the account is divided by the uniform single life expectancy for a 71 year old, or 26.5 years. Recalculating the life expectancy factor each year enables you to stretch out distributions for many years in the future.
A yearly reduction method is also available and may prove a better result for your beneficiary. This determination election may have significant estate planning consequences and should be made after considering all options.
Are there restrictions on who can be named as beneficiary?
No, but if you are married and name a non-spouse, a spousal waiver may be required. More complicated tax issues may arise when your choice of beneficiary is interwoven into an overall estate plan. Naming a non-spouse or non-person beneficiary (such as an estate or trust) should be done carefully and with consultation from a professional.
What will happen to my IRA when I die?
When you establish an IRA, you will also name one or more beneficiaries who will inherit the assets in your IRA when you die. The beneficiary payout rules vary depending on whether a surviving spouse is the beneficiary and whether you were required to begin minimum distributions before your death. Also, depending on the size of your IRA rollover, your estate may be liable for an excise tax on a portion of your IRA.
Under current law, a spouse beneficiary has considerable flexibility in deciding how and when to receive the proceeds of an IRA. Due to the unlimited marital estate tax exclusion, proceeds from an IRA are not subject to estate tax when paid to a surviving spouse.
A spouse may elect to:
- Defer commencement of payments out of the IRA until April 1 of the year after the owner would have reached age 70½.
- Roll over the IRA to his or her own IRA. The amount rolled over will be treated as the surviving spouse’s own, and will be subject to all IRA rules based on the surviving spouse’s age.
- Treat the IRA as his or her own IRA and make ongoing contributions to it.
If an individual names a non-spouse beneficiary and dies before the required beginning date for taking minimum distributions from the IRA rollover, the beneficiary must withdraw all of the money by December 31 of the calendar year containing the fifth anniversary of the owner’s death. The only exception to this requirement is if the beneficiary decides to withdraw the IRA over his or her life expectancy. If this option is elected, payments from the IRA must begin by the December 31 of the calendar year immediately following the calendar year of the owner’s death.
If an individual dies after starting scheduled distributions based on life expectancy, the remaining balance of the IRA rollover must be distributed at least as rapidly as under the original schedule.