Distributions from Your Retirement Account: The Top Ten List
I’m routinely asked questions about what taxes and rules apply when a distribution occurs from a retirement account. Here are the top ten rules you should know about distributions from retirement accounts:
The first 5 facts apply to Traditional IRA and 401(k) accounts
1. Early Withdrawal Penalty
A distribution from a traditional IRA or 401(k) before the account owner reaches 59 1/2 causes a 10% early withdrawal penalty on the amount distributed. This is in addition to taxes owed on the amount distributed.
EXAMPLE
So, for example, if you take a $10,000 distribution from your traditional IRA at age 45 then you will be subject to a $1,000 penalty and you will also receive a 1099-R from your IRA custodian and will need to report $10,000 of income on your tax returns.
$1,000
early withdrawal penalty
$10,000
income to report
Once you reach age 59 1/2, the 10% early withdrawal penalty does not apply.
2. Required Minimum Distributions
Whether you need the money or not, at age 70 1/2, the IRS requires a traditional IRA or 401(k) owner (unless still employed by employer 401(k)) to begin taking distributions from their retirement account. These distributions are subject to tax and the account owner will receive a 1099-R of the amount distributed that will be included on their tax return. The amount of the distribution is based on the person’s age and the account’s value. For example, someone with a $100K IRA who has turned 70 1/2 and is taking their first RMD would take $3,639 (3.79%).
UPDATE (NOV 2026)
Required minimum distributions now start at age 73 (rising to 75 in 2033) under the SECURE 2.0 Act. This article was written when they started at 70½. (Source: IRS)
3. Avoid Taking Large Distributions In One-Year
Because distributions from traditional retirement accounts are subject to tax at the time of distribution, it is wise to avoid taking too much in one year as a large distribution can push your distribution income and your other income into a higher tax bracket.
EXAMPLE
For example, if you have employment and or rental/investment income of $50,000 annually then you are in a joint income tax bracket of 15% on additional income. However, if you take $100,000 as a lump-sum that year this will push your annual income to $150K and you will be in a 28% income tax bracket. If you could instead break up that $100K over two tax years then you could stay in 15% to 25% tax bracket and could reduce your overall tax liability.
In short, only pull out what you need when you need it to lessen the immediate year’s tax liability.
4. Distribution Withholding
Most distributions from an employer 401(k) or pension plan (including solo K), before the age of 59 1/2, will be subject to a 20% withholding that will be sent to the IRS in anticipation of tax and penalty that will be owed. In the case of an early distribution from an IRA, a 10% withholding for the penalty amount can be made but you can also elect out of this automatic withholding provided you make an estimated tax payment or that you will otherwise be current on your tax liability.
5. If You Have Tax Losses, Consider Converting to a Roth IRA or Roth 401(k)
When you have tax losses on your tax return you may want to consider using those losses to offset income that would arise when you convert a traditional IRA or 401(k) to a Roth account. Whenever you convert a traditional account to a Roth account, you must pay tax on the amount of the conversion. In the end though, you’ll have a Roth account that grows entirely tax-free and that you don’t pay taxes on when you distribute the money. Using the losses when they are available is a good way to get your Traditional retirement funds over to Roth.
The final 5 rules are for Roth IRAs and Roth 401(k)s
6. Roth IRAs Are Exempt from RMD
While traditional IRA owners must take required minimum distributions (“RMD”) when the account owner reaches age 73, Roth IRAs are exempt from RMD rules. That’s a great perk and allows you to keep your money invested as long as possible.
7. Roth 401(k)s Must Take RMD
UPDATE (NOV 2026)
Since 2024, Roth 401(k) and Roth 403(b) accounts no longer require RMDs during the owner’s lifetime (SECURE 2.0 Act). The section below describes the rules before that change. (Source: IRS)
Roth 401(k) designated accounts are subject to RMD. This is a confusing rule since Roth IRAs are NOT subject to RMD. Such is the tax code.
8. Distributions of Contributions Are Always Tax-Free
Distributions of contributions to a Roth IRA are always tax-free. Regardless of age, you can always take a distribution of your Roth IRA contributions without penalty or tax.
9. Distributions of Roth IRA Earnings
In order to take a tax-free distribution from a Roth IRA, you must be age 59 1/2 or older and you must have had a Roth IRA for five years or longer. As long as those two criteria are met, all amounts (contributions and earnings) may be distributed from a Roth IRA tax free. If your funds in the Roth IRA are from a conversion, the converted amount itself can be distributed tax-free (you paid the tax when you converted), but if you are under 59 1/2, you must have converted the funds at least 5 years ago to avoid the 10% early withdrawal penalty on that amount.
10. Delay Roth Distributions
Roth retirement accounts are the most tax efficient way to earn income in the U.S. As a result, it is best to distribute and use other funds and assets that are at your disposal before using the funds built up in your Roth account as those funds aren’t as tax efficient while invested.
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