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1 1 (January 8, 2020)

handle is hein.crs/govcaeb0001 and id is 1 raw text is: FF.ri E~$~ & Updated January 8, 2020 Early Withdrawals from Individual Retirement Accounts (IRAs) and 401(k) Plans Congress created incentives for certain individuals to save for retirement through Individual Retirement Accounts (IRAs) and 401(k)s. Employees (and sometimes employers in the case of 401(k) plans) contribute funds to a tax- advantaged account, which can then be used as an income source in retirement. To discourage account owners from withdrawing funds before retirement, the Internal Revenue Code (IRC) generally imposes a 10% penalty (in addition to applicable income taxes) on early withdrawals, which are withdrawals that occur before an individual reaches age 591/2. Individuals who make early withdrawals are subject to rules that vary by plan type, the circumstance warranting a withdrawal, and plan-specific rules. IRAs generally have fewer restrictions on early withdrawals than do 401 (k)s. For example, individuals may withdraw funds, but generally with a penalty, from an IRA for any reason, but withdrawals from 401 (k)s (1) must be allowed by the plan and (2) may be an in-service distribution (i.e., a distribution while an employee is still working) or a hardship distribution (i.e., for an employee's hardship reason). IRAs are tax-advantaged savings accounts for individuals or married couples. IRAs are funded by three sources: the individual's contributions, rollovers (i.e., transfers), and earnings. Traditional IRA contributions can be tax deductible, but withdrawals are generally included in taxable income. Roth IRA contributions are not tax deductible, but qualified distributions (defined below) are not included in taxable income. Both types allow account owners to withdraw funds at any time, but they have distinct rules governing early withdrawals. Early withdrawals from traditional IRAs-those occurring before age 591/2 are subject to a 10% penalty unless an exception described below applies. The withdrawal amount is also included in taxable income. \Ears fr;'orn R;o&.d M',,P Roth IRA distributions (i.e., withdrawals) are characterized as (1) returns of regular contributions, (2) qualified distributions, and (3) nonqualified distributions. Each is subject to distinct withdrawal rules. Returns of regular contributions, which are withdrawals of original contributions, are neither included in taxable income nor subject to the 10% penalty. Qualified distributions, which include earnings on contributions, are those that occur after the account is at least five years old and are (1) made after an account owner turns 591/2, (2) made after an account owner becomes disabled, (3) made to a beneficiary after an account owner's death, or (4) used for a first-time home purchase. Qualified distributions are not subject to income tax or the 10% penalty. Nonqualified distributions are those that do not meet the qualified distribution guidelines and are subject to a 10% penalty unless an exception applies. The taxable portion of any nonqualified distribution (e.g., earnings on contributions) may be included in taxable income. Conversions-rollovers from a traditional IRA to a Roth IRA-that have not met a separate five-year requirement are considered nonqualified distributions and are subject to the penalty. Conversions and rollovers from other Roth IRAs are not included in taxable income. A 401(k) is an employer-sponsored retirement savings plan in which participants have individual accounts. Employee contributions are excluded from taxable income (up to a contribution limit), but withdrawals are included in taxable income. Some 401(k) plans include an employer match, in which employers contribute to an employee's account based on the employee's contribution levels. Plans are required to distribute vested benefits-those that are owed to an employee based on plan rules upon certain distributable events, such as an employee's death, disability, retirement, or separation from service. Retirement age varies by plan but typically ranges from age 62 to age 65. Employees may also receive distributions upon a plan's termination. Employees under 55 years of age who separate from an employer and take a distribution instead of keeping the balance in the plan or rolling it over to a new employer plan or an IRA face a 10% penalty. Plans may allow (1) in-service distributions and (2) hardship distributions. In both cases, if the account owner has not reached age 591/2, distributions are included in taxable income and are subject to a 10% penalty unless an exception described below applies. Plan documents specify whether these features are available and, in the case of a hardship distribution, the requirements to demonstrate one. In addition, plans may allow participants to borrow (i.e., in the form of loans) from their accounts. Loans are not early withdrawals except in the case of default. If default occurs, K~:> mppm qq\ p\w gn'a', ggmm M 'M I 11LINUALiM,

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