Five Ways to Withdraw Your Retirement Savings Early – Part 4
Use Corrective Distributions to withdraw from your retirement savings before age 59 1/2 without a 10% penalty.
Jun 14, 2016
Use Corrective Distributions to withdraw from your retirement savings before age 59 1/2 without a 10% penalty.
Continuing in our series on exceptions to the 10% withdrawal penalty, we identify corrective distributions as another exception.
Corrective Distributions can be made on excess deferrals, and excess aggregate contributions under various types of qualified plans.
Excess Deferrals
An excess deferral is a contribution that exceeds the salary deferral amount you may contribute to an employer sponsored retirement plan in any given year. The plan will require the excess be distributed to you. You must take the corrective distribution (including earnings) by April 15 of the following year. The excess deferral is taxed in the year the contribution was made to the plan. The earnings are taxed in the year of the distribution.
Excess Aggregate Contributions
These are excess contributions made to a qualified plan that may cause the plan to fail certain non-discrimination tests. Contributions include both employee contributions and employer match contributions. Determination of exceeded limits is calculated after year-end based on total participant compensation and contributions made during the year. The IRS will allow for distribution of the excess. The amount distributed in excess is taxable to the participant in the year the distribution is made. The amount must also include any allocable earnings/losses through the end of the plan year.
Please Note: Excess Roth contributions are not taxable, but any earnings on the Roth contribution would be.
Distributions of Excess Deferrals and Excess Aggregate Contributions are generally only required to be made by certain Highly Compensated Employees, in instances where not enough non-Highly Compensated Employees have benefitted under the plan.
Tax Reporting
The gross corrective distribution amounts and taxable amounts are both reported on Form 1099-R. You may see Code 8 or P in box 7 (with Code B, if applicable).