Accessing Funds: Tax Implications of Distributions
Under IRS rules, distributions are subject to taxes and penalties depending on the participant’s age and type of contribution account, as described below:
Note: These are general tax guidelines. Participants should always be directed to seek tax advice from their legal or tax advisor.
|Type of Distribution||Subject to Ordinary Income Tax||Subject to Penalty Tax for Early Payment||Eligible for Rollover|
|After-tax employee contributions||Only the earnings||Only the earnings||Yes*|
|Roth 401(k) contributions||Only the earnings, except for a “qualified” distribution||Only if taxable||Yes|
|All other contributions||Yes||Yes||Yes|
* The Program will need specific instructions to include after-tax contributions in a rollover distribution, if applicable.
Withdrawals from Roth 401(k) Contributions
Please note that special tax consequences apply to withdrawals from Roth 401(k) contributions. The taxation of a hardship withdrawal from Roth 401(k) contributions depends on whether the withdrawal is a qualified distribution. “Qualified” distributions from Roth accounts are fully excludable from gross income. To be qualified, the distribution must be made after:
- The participant has reached age 59½, become disabled or died, and
- The Roth account has been maintained for at least five years.
In all other cases, the distribution is nonqualified. Nonqualified distributions are treated partly as a tax-free return of contributions and partly as receipt of taxable investment earnings.
Avoiding a Tax Penalty on Distributions
The participant can avoid paying current withholding taxes and penalties by leaving his or her money in the plan or by requesting a direct rollover to:
- An individual retirement account (IRA), or
- An eligible employer-sponsored retirement plan.
These are general tax guidelines. Participants should always be directed to seek tax advice from their legal or tax advisor.