A participant can withdraw his or her account balances upon an occurrence of a distributable event:
- Termination of employment
- Early or Normal Retirement
- Disability Retirement
- Death (payable to beneficiaries)
- In-Service, while actively employed. Typically after age 59 ½
- Hardship Withdrawal
- Military and Disaster Relief
- Qualified Domestic Relations Order
A distribution from a plan will typically yield a taxable distribution. The main exception is when a plan allows after-tax or Roth contributions. A taxable distribution may be subject to an additional 10% penalty tax if the participant is under age 59 ½.
An IRS Form 1099-R will be issued by January 31st in the year following the distribution. This form will indicate the taxable amount and include a distribution code to help a tax payer determine the tax obligations.
Typically, to loan money from the plan to an interested party, such as a participant or owner, is a prohibited transaction. However, the IRS allows participant loans subject to the following requirements:
- Level payments of not more than 5 years (30 years for purchase of primary residence)
- Bares reasonable interest rate
- Aggregate participant loan balances that do not exceed lesser of 1) $50,000 or 2) 50% of vested account balance
- Makes payments at least quarterly
A loan that is not paid as schedule or is issued in violation of the above rules will be subject to a deemed distribution, meaning the outstanding balance is taxable.