The IRS issues rules about the withholding of taxes from distributions from a 401(k) plan or other tax-qualified plans. These rules can and often do change from time to time. This chart is intended to provide a high-level summary of current IRS rules. You should review the plan documents as well, which also control whether certain distributions are allowed by your plan and any specific rules which may differ from the summary information presented in this chart. Vestwell is not a law firm or tax advisor. We can not and do not provide any legal, tax, investment, or financial advice to any individual. We strongly encourage you to consult with a tax or other qualified financial professional before taking any type of distribution from your plan.
| Distribution Type |
Federal Tax Withholding Rule*1 |
|||
| Eligible for Rollover to an IRA or other tax-qualified plan? | 10% Early Distribution Tax*2 | Mandatory 20% Withholding*3 | Participant May Waive Withholding of Taxes*4 | |
|
Distribution due to IRS tax levy*5 |
N | N | Y | N |
| Distribution to Alternate Payee due to Qualified Domestic Relations Order ("QDRO")*6 | Y | N | Y | N |
| Part of a series of substantially equal periodic payments made for the life (or life expectancy) of the employee of the joint lives of the employee and designated beneficiary*7 | Less than 10 years Y Other distributions N |
N | Y | |
| For 10 or more years (Installments for under 10 years are eligible for rollover distributions) | ||||
| Qualified Reservist Distribution | N | N | N | |
| Hardship Withdrawals*8 | N | Y | N | Y |
| Distribution made to a participant pursuant to IRS or DOL correction rules*9 | N | N | N | N |
| Coronavirus-Related Distributuons (ended 12/31/20) | Y*10 | N | N | Y |
| Distribution due to certain federally-declared natural disasters (other than a hardship withdrawal)*11 | N | N | Maybe (depending on specific FEMA guidance) | |
| Distribution of up to $1,000 for personal emergencies (effective after December 31, 2023)*12 | N | N | N | |
| Distribution of up to $5,000 for qualified birth or adoption of a child*13 | N | N | N Statutory exemption |
Y |
| Distribution of up to lesser of $10,000 or 50% vested account balance for victims of domestic abuse*14 | N | N | N | |
| Distribution for participants with a terminal illness*15 | N | |||
| Distribution of up to $2,500 for long-term care insurance*16 | N | N | N | |
| Permissive withdrawals from Automatic Enrollment Plan*17 | N | N | N | N |
| Loans*18 | N | N | N | N |
| Disability*19 | Yes if otherwise eligible | N | Y If in a form such as a lump sum eligible for rollover |
N |
| Required Minimum Distribution ("RMD")*20 | N | N | N | Y |
| Any other type of in-service withdrawal or rollover out of the plan that is permitted by the plan and not mentioned in any of the other categories above | Generally, yes, but see footnote*21 | Y | Y | N |
|
Separation of Services |
||||
| Terminating employee | Y If paid as a lump sum or in installments for fewer than 10 years |
N*22 | Y | N |
| Death | ||||
| Death Distributions (payment to a spouse)*23 | Y | N | N | |
| Death Distributions (payment to a non-spouse beneficiary) |
Y If satisfy direct Rollover requirements*24 |
N | N If rolled over by direct transfer IRA Y |
Y If not rolled over |
| Retirement | ||||
| Normal Retirement Age (but other than an RMD) | Y | N | Y | N |
| Early Retirement | Y |
Maybe depends on the participant's age and plan rules |
Y | N |
| Plan Termination | ||||
| Plan Termination*25 | Y | N | Y | N |
| Conversions | ||||
| In-Plan Roth conversion to designated Roth account | N/A | N | N | N/A |
*1 Distributions of less than $200 are not subject to federal income taxes. In addition, withholding is not required on the portion of any distribution representing amounts not subject to tax on the distribution, such as a distribution including after-tax contribution or a qualified Roth distribution. In general, unless otherwise noted in this chart, the IRS treats a distribution as ordinary income and requires recordkeepers to withhold 20% of the distribution amount for federal taxes. If a distribution is not an eligible rollover distribution, then a 10% federal tax is withheld unless the participant or beneficiary elects to waive such withholding.
*2 In general, the IRS requires an additional 10% withholding if the participant is under age 59 1/2, which is indicated on this chart where definitive IRS guidance is available (and referred to in this chart as a “10% Early Distribution Tax.” In some instances, the IRS has made exceptions to the 10% Early Distribution Tax where the distribution rules are modified by other laws, such as for a $5,000 withdrawal for a qualified birth or adoption of a child which has been exempted from the 10% Early Distribution Tax by the SECURE Act. As of the date of this updated chart, there is pending legislation, including the EARN Act, that proposes to add several more categories to the list of the types of withdrawals from a 401(k) plan or other tax-qualified plans where the 10% Early Distribution Tax will not apply.
*3 The 20% mandatory withholding applies only to eligible rollover distributions that are not directly rolled over. If a distribution is not eligible to be rolled over (for example, a hardship distribution), it is exempt from 20% mandatory federal tax withholding. If a participant intends to roll over the distribution but does not provide information allowing a transfer to the trustee or custodian to another eligible plan, the 20% tax withholding would be required.
*4 Our platform and our distribution payment vendor might not be able to support a participant’s request not to withhold taxes. You must confirm with the Vestwell Client Services Team first to determine if this option is available for your distribution type.
*5 This situation can arise if the IRS obtains a judgment against a participant and the court permits recovery from the plan.
*6 Distributions cannot be made pursuant to a QDRO until the participant has completed a QDRO Submission Form and Vestwell and the TPA if the plan has one, have reviewed and approved it.
*7 As of October 2022, the Vestwell platform does not support this type of distribution.
*8 A 401(k) plan may allow participants to receive a hardship distribution because of an immediate and heavy financial need. If they are permitted by the plan, a distribution is treated as a hardship distribution only if it is made on account of the hardship. Vestwell is permitted to accept participants’ self-certification that they are qualified to take a hardship distribution unless we have reason to know otherwise (e.g.: the plan sponsor has informed us to the contrary). A hardship distribution must be limited to the participant’s total vested elective deferrals reduced by any previous distributions and may be given only for the following purposes:
- Expenses for medical care previously incurred by the employee, the employee’s spouse, or any dependents of the employee or necessary for these persons to obtain medical care;
- Costs directly related to the purchase of a principal residence for the employee (excluding mortgage payments);
- Payment of tuition, related educational fees, and room and board expenses, for the next 12 months of postsecondary education for the employee, or the employee’s spouse, children, or dependents;
- Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence;
- Funeral expenses; or
- Certain expenses relating to the repair of damage to the employee’s principal residence that would qualify for the casualty deduction under IRC §165.
Hardship withdrawals are not subject to the 20% mandatory withholding, but they are subject to tax on the taxable amount of the distribution. For example, hardship withdrawals paid from the Roth account or that are deemed a return of after-tax contributions are excluded from the amount reported are not subject to taxes or regular withholding.
*9 Depending on the nature of any benefits administration error, a distribution (with any earnings) may need to be made to a participant to correct instances where a participant has contributed to the Plan beyond the IRS approved limits, for example. If the correction is timely made, the 10% Early Distribution Tax does not apply.
*10 Distribution treated as though it were paid in a direct rollover to an eligible retirement plan if the distribution is eligible for tax-free rollover treatment and is recontributed to an eligible retirement plan with then 3-year period beginning on the day after the date on which the distribution was received.
*11 Distributions due to a natural disaster are determined by the Federal Emergency Management Agency (“FEMA”) and there are generally specific tax withholding rules. Therefore, this chart is intentionally left incomplete for this line item. Please consult with applicable FEMA guidance to confirm the tax withholding rules for any specific natural disaster.
*12 The SECURE Act 2.0 allows this new penalty-free distrtibution. It has not gone into effect as of the date of this update and we expect regulatory guidance, which may change some of the rules pertaining to this distribution type.
*13 These distributions can also be contributed back into the plan up to three years after taking this type of distribution
*14 Effective after December 31, 2023.
*15 This is a new type of distribution that went into effect in December 2022. We are expecting regulatory guidance to understand how this distribution is taxed and whether it is eligible for a rollover.
*16 This distribution type does not go into effect until after December 31, 2025.
*17 This is a special type of distribution that may be made to a participant in an automatic enrollment plan where the participant failed to timely opt out of enrollment or an error was made in opting the participant out. The participant must first complete the permissive withdrawal form. Please contact the Vestwell Client Services Team for assistance. See also IRC §414(w)(1)(B).
*18 The rules mentioned in the chart apply as long as the loan satisfies the plan’s rules and the participant is in good standing on repayment. If the participant fails to repay the loan, and in certain other circumstances such as during a merger or acquisition of the plan sponsor, the loan may be treated as a distribution and the regular income tax and withholding rules apply.
*19 Note that the plan document may have a different definition of “disability” than the plan sponsor’s disability benefits plan, group medical insurance plan, or the definition used to obtain Social Security benefits (as defined in IRC §72(m)(7). As with all other rules relating to this chart, the definition in the plan document controls. This must satisfy the IRS definition of total disability (the definition used to obtain Social Security benefits) in order to be exempt from the 10% Early Distribution Tax.
*20 RMDs are not subject to the 20% mandatory withholding, but they are subject to tax on the taxable amount of the distribution. For example, RMDs paid from the Roth account or that are deemed a return of after-tax contributions are excluded from the amount reported are not subject to taxes or regular withholding.
*21 The participant should obtain advice from its own tax professional. Vestwell is not a law firm or tax advisor and cannot and does not provide this advice.
*22 If the employee separates from service before reaching age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan), there is an additional 10% Early Distribution Tax. See IRC§§ 72(t)(2)(A)(v), 72(t)(10).
*23 A distribution to a spouse follows the same taxation and rollover rules as the distribution would have been treated if it was paid to the participant.
*24 Non-spousal beneficiaries may ask to have benefits distributed by the plan in a plan-to-plan transfer to an inherited IRA if the plan permits it.
*25 If the plan is terminating (such as if the plan sponsor is dissolving its business or has filed for bankruptcy protection) all assets of the plan must be distributed.
We hope you found the above information helpful. If you need further assistance, please get in touch with us at help@vestwell.com