A participant can withdraw his or her account balances upon an occurrence of a distributable event:

  1. Termination of employment
  2. Early or Normal Retirement
  3. Disability Retirement
  4. Death (payable to beneficiaries)
  5. In-Service, while actively employed. Typically after age 59 ½
  6. Hardship Withdrawal
  7. Military and Disaster Relief
  8. 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:

  1. Level payments of not more than 5 years (30 years for purchase of primary residence)
  2. Bares reasonable interest rate
  3. Aggregate participant loan balances that do not exceed lesser of 1) $50,000 or 2) 50% of vested account balance
  4. 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.

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