Insights & Ideas

Distribution Rules

Distributions Before and After Age 59 1/2

If you withdraw money from a Traditional IRA, Rollover IRA or a SEP-IRA, you must pay income taxes on the money. You'll also be assessed a 10% federal penalty tax unless you meet the special criteria in the box below. This penalty tax applies only to the taxable amount of the distribution, not the amount attributable to non-deductible contributions.

If you withdraw money from a Roth IRA and you are under age 59½, you will not be taxed or pay a penalty on the contributions you withdraw, but your earnings will be taxed as income and you will pay a penalty tax on the income, unless you own the account for at least five years and you meet one of the exceptions listed below.

Exceptions to the 10% Early Distribution Penalty Tax
Under Section 72(t) of the Internal Revenue Code, you can avoid the 10% penalty tax that applies to early distributions from an IRA if you:

  • Die or become disabled.
  • Use the distribution for qualified higher education expenses such as tuition for you or your dependents.
  • Use the distribution for a first-time home purchase ($10,000 lifetime limit).
  • Use the distribution for deductible medical expenses, or to pay medical insurance premiums while you are unemployed.
  • Use the distribution for an IRS levy on the IRA.
  • Take the distribution in a series of substantially equal annual payments for five years or until age 59½, whichever comes later.
  • Take the distribution as a timely removal of an excess contribution.

Please contact your tax advisor before making any distribution decisions.

After you reach age 59½, you can take money out of a Traditional, Rollover IRA or SEP-IRA whenever you want for any reason without any early distribution tax penalty. However, you must pay ordinary income tax on any tax-deductible contributions you previously made and on all accumulated earnings that are included in your distribution.

If you're age 59½ and you've owned a Roth IRA for at least five years, you can withdraw funds tax-free. If you've owned a Roth IRA for less than five years, you will pay income taxes on the earnings, but no penalty tax.

Required Minimum Distributions At Age 70 1/2

As with other tax-deferred retirement savings vehicles, you are required to take at least a minimum distribution from your Traditional IRA, Rollover IRA, and SEP-IRA each year beginning with the year you turn 70½. (There is a 50% penalty tax on amounts that are not distributed.) The distribution for the year you turn 70½ may be delayed until April 1 of the following year. The distribution for each year after you turn 70½ must be taken by December 31. If you wait until April 1 to take the first distribution, you will have to take two distributions in the same year.

It is a requirement that 10% of your Traditional, Rollover and Sep-IRA distibutions be withheld for federal income tax purposes unless you elect not to have taxes withheld. This withholding applies to the total amount of each distribution even if part of it is attributable to nondeductible contributions.

If you opt out of withholding or do not have enough tax withheld, you may have to pay taxes and you may incur penalties if estimated tax payments are insufficient.

If you are entitled to receive a distribution from a retirement plan, the plan administrator is required to provide you with a detailed notice explaining the applicable tax rules. For more specific information about distribution rules — including information on the required minimum distribution regulations and how they apply to your particular situation — contact your financial advisor, and/or tax professional.

Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.

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