1. Lecture 26 Qualified Plan Distributions and Loans You are taxed on any distributions from qualified plans You are also subject to penalties if you take your money out: –Too soon –Too late –Too little –Too much Loans may be permitted

2. Too Soon A 10% penalty applies to withdrawals from a qualified plan unless the employee is: –At least 59 1/2 years old –Dead –Disabled –Separated from service after age 55 –Separated from service and taking payments over lifetime (or joint and survivor) –Has deductible medical expenses (over 7.5% of AGI)

3. Too Soon - Example Earl Early, born 1/7/50, quits his job in 1999 and takes his 401(k) account of $150,000 in a lump sum. He is in the 28% Federal tax bracket. How much does he get to keep after taxes and penalties? Answer: –Early distribution penalty: $15,000 –Tax:$42,000 –Amount remaining:$93,000

4. Too Late/Too Little Withdrawals must begin by April 1 of the calendar year following when the employee turns 70 1/2 (or the year of actual retirement if later) Withdrawals must be in substantially equal payments over life of employee (or joint and survivor) Applicable penalty: 50% of the minimum amount that should have been withdrawn

5. Too Late/Too Little - Example Carl Careless, born 1/4/30, has $300,000 in a qualified profit sharing plan. If he retired on 7/4/95, when does he need to begin withdrawing money from this account? Answer: April 1, 2001 If he forgets to take any withdrawals in 2001, what is his penalty? Assume his life expectancy at age 71 is 15 years. Answer: 50% x (300,000/15) = $10,000

6. Too Much If annual withdrawals from qualified plans in total exceed $150,000 (or $112,500 indexed), then the excess is subject to a 15% penalty tax. This penalty is reduced by the 10% penalty (if any) on early withdrawals.

7. Too Much - Example Gene Goodinvestor, born 5/7/39, retires on 1/1/99 and takes his defined contribution pension plan as a life annuity. This pays him $250,000 in 1999. He is in the 35% Federal and 5% state tax bracket. How much does he get to keep after taxes and penalties? Answer: –Excess distribution penalty: 15,000 –Taxes:100,000 –Amount remaining:135,000

8. Loans Restricted to hardship cases Loans limited to lesser of: –$50,000 minus highest outstanding loan balance in preceding year –1/2 the present value of the employee’s vested accrued benefit Repayment terms –5 years unless loan is for a principal residence