The Bush Wealth Advantage: Distribution Rules

| July 6, 2016

By Stacy Bush | Valdosta Today Financial Contributor

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Our column, “The Bush Wealth Advantage” is our way of giving back to the community with all sorts of insights, relevant news, and practical wealth planning strategies.

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 70½.

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 percent 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 prior to age 59½, any taxable earnings you receive will be subject to the premature penalty tax unless an exception applies. In addition, if you convert funds from a traditional IRA to a Roth IRA, or roll over non-Roth funds from an employer retirement plan to a Roth IRA, and then take a distribution from that Roth IRA prior to age 59½ and within five tax years of the conversion or rollover, the penalty tax does apply. The premature distribution penalty applicable to distributions from a SIMPLE IRA plan during your first two years of participation is 25 percent, rather than 10 percent. 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 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 70½. In the case of an employer-sponsored retirement plan, if you work past age 70½, 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 50 percent federal penalty tax on the undistributed amount.

Roth IRAs are subject to special rules–you are not required to take any minimum distributions from your Roth IRAs during your lifetime.


Stacy Bush has practiced independent financial advising in the Valdosta area for 15 years. Growing up on a farm in Donalsonville, Georgia, he is keen to the financial needs of South Georgia and North Florida families. Stacy and his wife, Carla, live in Valdosta with their four children. You can submit questions about this article to askstacybush@lpl.com

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Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Bush Wealth Management and LPL financial are separate entities.

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