Retirement Plan Distributions
If you have a retirement plan with a former employer and it has both traditional and Roth contributions , would withdrawal of all the funds be treated as one transaction or two? I’m assuming the mandatory 20% withholding would be required. I am 58 so I’m assuming there would be a 10% early withdrawal penalty. Would it be better to do a direct transfer to my credit union account before taking a distribution?
Permalink Submitted by Alan - IRA critic on Thu, 2020-12-31 23:44
Is your CU account an IRA or Roth IRA, or do you intend to take a taxable distribution with no rollover?
A distribution from the pre tax and Roth portions of the account are each separate transactions. Why are you concerned about this issue, does the plan have a transaction limit? The one rollover rule does not apply to distributions from qualified plans.
Yes, mandatory 20% withholding applies, but only to the taxable portions of distributions. For example, a distribution of your Roth contributions is not taxable, but the earnings that come with them are taxable. The 10% penalty applies to the same taxable portions of any distributions.
If you have a Roth IRA to do a direct rollover to of the Roth portion, you could then distribute only the Roth contributions, and leave the earnings in the Roth IRA where they will become tax free at 59.5 as long as you have had a Roth IRA for at least 5 years.
Does your employer plan have a small balance? If not, a total distribution with no rollover will leave you with a considerable tax bill and penalty.