Generally, a retirement plan can distribute benefits only when certain events occur. Your summary plan description should clearly state when a distribution can be made. The plan document and summary description must also state whether the plan allows hardship distributions, early withdrawals or loans from your plan account.
A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.
A plan distribution before you turn 65 (or the plan’s normal retirement age, if earlier) may result in an additional income tax of 10% of the amount of the withdrawal. IRA withdrawals are considered early before you reach age 59½, unless you qualify for another exception to the tax.
- See Retirement Topics – Tax on Early Distributions for a chart of exceptions to the 10% tax
A retirement plan loan must be paid back to the borrower’s retirement account under the plan. The money is not taxed if loan meets the rules and the repayment schedule is followed. A plan sponsor is not required to include loan provisions in its plan. Profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans may offer loans. Plans based on IRAs (SEP, SIMPLE IRA) do not offer loans. To determine if a plan offers loans, check with the plan sponsor or the Summary Plan Description.
SEP and SIMPLE IRA plans
IRAs and IRA-based plans (SEP, SIMPLE IRA and SARSEP plans) cannot offer participant loans. A loan from an IRA or IRA-based plan would result in a prohibited transaction.
These plans use IRAs to hold participants’ retirement savings. You can withdraw money from your IRA at any time. However, a 10% additional tax generally applies if you withdraw IRA or retirement plan assets before you reach age 59½, unless you qualify for another exception to the tax.
- Required Minimum Distributions
- When can a retirement plan distribute benefits?
- Considering a loan from your 401(k) plan?
- Types of Retirement Plan Benefits - lump sums, annuities and spousal rights
- Rollovers to and from other retirement plans
- Retirement Topics - Hardship Distributions
- Retirement Topics - Loans
- Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
- Publication 554, Tax Guide for Seniors