10.5 Distributions, Penalties & Rollovers
Managing retirement distributions requires understanding IRS early withdrawal penalties and avoiding taxable events through direct rollovers.
Key FINRA Exam Takeaways
- Early withdrawal penalty: 10% IRS penalty on taxable distributions before age 59½.
- Exceptions to 10% penalty: Death, permanent disability, qualified higher education expenses, first-time homebuyer ($10,000 lifetime), substantially equal periodic payments (Rule 72t).
- 60-Day Indirect Rollover: Participant takes possession of funds; must deposit into new IRA within 60 calendar days; limited to ONE rollover per 12-month period.
- Direct Trustee-to-Trustee Transfer: Funds move directly between custodians; no 60-day limit, no withholding, unlimited frequency.
Direct Transfer vs. 60-Day Rollover
In a 60-day rollover from an employer plan, the plan must withhold 20% federal tax. To roll over 100%, the participant must replace the 20% from personal funds and recover it via tax return. In a direct trustee-to-trustee transfer, 100% of the funds transfer with 0% withholding.
Knowledge Checkpoint • Section 10.5
An employee leaves a firm and requests a direct trustee-to-trustee transfer of their 401(k) balance into an individual Traditional IRA. What percentage of the distribution will be withheld for federal income taxes?