Since a number of people mistype mandatory 301(k) distributions when they mean 401(k), we posted here the rules for mandatory 401(k) distributions.
The general rule is that you don’t need to take any distribution until the April 1 after you reach age 70 ½. For most people, it’s best to take their mandatory 401(k) distribution in the year that they turn 70 ½ rather than waiting another six months. If you wait, you will likely need to take to distributions the following year which could put you in another tax bracket. Let’s look at an example.
John turns age 70 ½ in August 2016. He decides to wait until April 1, 2016 when he must take his first mandatory 401(k) distribution. So on April 1, 2017 he takes the mandatory distribution from his 401(k) account. However, he will need to take his 2nd year’s distribution by December 31 of 2017. It would have likely been better for him to take his first distribution in 2016 rather than having two mandatory 301K distributions in 2017 (oops, we mean 401k).
I think of distributions from a 401(k) plan as being bracketed by two ages. If you take distributions prior to age 59 ½, you pay a penalty. If you don’t take distributions by April 1 after you attain age 70 ½, you pay a penalty. So between the ages of 59 ½ and 70 ½ you
have choice to do whatever you want. Here the exceptions to those two age brackets.
If you work for a company and participate the 401(k) plan but you separate from service (i.e. quit or get fired) as early as age 55, you may take 401(k) distributions without penalty.
If it age 70 ½ in six months you are still working for the company and you do not own 5% or more of the shares of the company, you can defer distributions until you actually retire without penalty.
Here are additional valid reasons for which IRS permits a penalty free 401k distribution:
| The distribution will NOT be subject to the 10% additional early distribution tax in the following circumstances: |
Exception |
||
|
Qualified Plans |
IRA, SEP, SIMPLE IRA* |
Internal Revenue Code |
|
| Age | |||
| after participant/IRA owner reaches age 59½ | yes | yes | 72(t)(2)(A)(i) |
| Automatic Enrollment | |||
| permissive withdrawals from a plan with auto enrollment features |
yes | yes for SIMPLE IRAs and SARSEPs | 414(w)(1)(B) |
| Corrective Distributions | |||
| corrective distributions (and associated earnings) of excess contributions, excess aggregate contributions and excess deferrals, made timely |
yes | n/a | 401(k)(8)(D), 401(m)(7)(A), 402(g)(2)(C) |
| Death | |||
| after death of the participant/IRA owner | yes | yes | 72(t)(2)(A)(ii) |
| Disability | |||
| total and permanent disability of the participant/IRA owner |
yes | yes | 72(t)(2)(A)(iii) |
| Domestic Relations | |||
| to an alternate payee under a Qualified Domestic Relations Order |
yes | n/a | 72(t)(2)(C) |
| Education | |||
| qualified higher education expenses | no | yes | 72(t)(2)(E) |
| Equal Payments | |||
| series of substantially equal payments | yes | yes | 72(t)(2)(A)(iv) |
| ESOP | |||
| dividend pass through from an ESOP | yes | n/a | 72(t)(2)(A)(vi) |
| Homebuyers | |||
| qualified first-time homebuyers, up to $10,000 | no | yes | 72(t)(2)(F) |
| Levy | |||
| because of an IRS levy of the plan | yes | yes | 72(t)(2)(A)(vii) |
| Medical | |||
| amount of unreimbursed medical expenses (>7.5% AGI; after 2012, 10% if under age 65) |
yes | yes | 72(t)(2)(B) |
| health insurance premiums paid while unemployed | no | yes | 72(t)(2)(D) |
| Military | |||
| certain distributions to qualified military reservists called to active duty |
yes | yes | 72(t)(2)(G) |
| Returned IRA Contributions | |||
| if withdrawn by extended due date of return | n/a | yes | 408(d)(4) |
| earnings on these returned contributions | n/a | no | 408(d)(4) |
| Rollovers | |||
| in-plan Roth rollovers or eligible distributions contributed to another retirement plan or IRA within 60 days |
yes | yes | 402(c), 402A(d)(3), 403(a)(4), 403(b)(8), 408(d)(3), 408A(d)(3) |
| Separation from Service | |||
| the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)** |
yes | no | 72(t)(2)(A)(v), 72(t)(10) |
301k Mandatory Distribution vs Company Plan Rules
Some people are confused by the issue of IRS rules versus rules of your company plan. Your company plan may be more restrictive than what IRS allows. And your company has every right to have terms of the 401(k) which are more restrictive the law allows. The company however cannot be more liberal than the rules from IRS.
For example, the plan’s terms may allow you to wait until the year you actually retire to take your first RMD (unless you are a 5% owner). Alternatively, a plan may require you to begin receiving distributions by April 1 of the year after you reach age 70½, even if you have not retired. So be sure you actually read your plan document before assuming that IRS rules apply.
Got a questions we have not answered about your mandatory 301k distributions (oops, we mean 401k)? Just leave it in the comment area below and our editors will provide a reply.
(For those who understand the issues of search engine optimization, you will understand why we have used the mistaken term 301k a few times in this post).