IRA vs. qualified plan distributions
IRA VS. QUALIFIED PLAN DISTRIBUTIONS
IRA distribution rules can often be more advantageous and friendly to investors than those of an employer-sponsored qualified retirement plan.
Most employer-sponsored qualified plans, such as 401(k) or 403(b) plans, require triggering events before participants can access their savings. Most often, you must reach a certain age, terminate employment, or suffer financial hardship before you can gain access to your funds.
IRA funds are always accessible, though a 10-percent penalty applies to many premature distributions. IRA distributions may be taken at any time, at any age, for any reason. This may not be the case with qualified plans. Accessibility is a powerful incentive for rolling over balances from accounts held with former employers into IRAs.
People often need their retirement savings to help pay higher education expenses for themselves or an immediate family member. According to the most recent version of IRS Publication 560, there is no penalty relief for qualified plan distributions taken prematurely and used to pay for education expenses. In this instance, a qualified plan distribution would be subject to a 10-percent penalty if the participant has not reached retirement age.
IRA distributions can be penalty-free to the extent that they are used to pay higher education expenses for the IRA owner or for an immediate family member.
Some qualified retirement plans may not have adopted current rules that apply to beneficiaries.
Rolling over inherited qualified plan assets to a Beneficiary Designated IRA can ensure that beneficiaries have either the ability to deplete the assets over 10 years or stretch distributions over their life expectancy. (Only certain beneficiaries will have the option of stretching the distributions over their life expectancy.)
First-time home purchases
Penalty relief for first-time home buyers does not apply to qualified plan distributions.
IRA owners may withdraw up to $10,000 from their IRAs without penalty toward the purchase of their first home. The penalty relief may also apply if the IRA distribution is used for the purchase of the first home for a family member of the IRA owner. IRS Publication 590-B explains this exception in greater detail.
Health insurance costs
Premature IRA distribution penalties are waived for distributions used to pay certain health insurance premiums. Conversely, a 10-percent penalty would still apply to distributions taken from a qualified plan to pay for the same type of premiums.
Most qualified plans require 20-percent federal income tax withholding on distributions payable to the participant. Participants often withdraw 20 percent more than they need to account for the mandatory withholding.
IRA distributions are not subject to mandatory withholding; therefore, you can withdraw exactly what you need and leave the rest potentially to grow. It is important to note, however, that taxes would be due by the tax filing deadline on IRA distributions not rolled to a qualified account within 60 days.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or lawyer.
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