Qualified Plan Withdrawals: IRA vs. 401(k)

Qualified Plans are designed to accumulate assets in anticipation of funding retirement needs, and, therefore, withdrawals from such plans are governed by fairly strict IRS rules. There are differences, though, in how withdrawals from IRA accounts are regulated versus those from 401(k) employer plans:

• You can take a distribution from an IRA at any time, for any reason, while distributions from a 401(k) are subject to the plan's rules if you are still working for that company. Both have IRS penalties involved if you are under age 59-1/2. While a 401(k) plan may allow loans to be made from the account, this should be considered a "last resort" option.

• You can avoid federal tax withholding on a distribution from an IRA (remember, all qualified plan withdrawals are subject to ordinary income tax), but distributions from a 401(k) plan eligible for rollover (you are no longer working for the company) are subject to mandatory 20% withholding.

• If you want to pay for college expenses for you or certain family members, such as your children, and you're under age 59-1/2, there is a special exemption from the 10% penalty you would normally pay on an early distribution if you take the money from an IRA account. There is no similar provision for money withdrawn from a 401(k).

• When meeting your required minimum distributions (RMD) after age 70-1/2, you can aggregate multiple IRA accounts to calculate your total IRA account RMDs, and then withdraw that total from only one or any other combination of those accounts. You cannot aggregate multiple 401(k) accounts. For a more detailed explanation of RMD requirements, read this article on our website.

• You can make a Qualified Charitable Distribution (QCD) from an IRA account, but not from a 401(k). A QCD is made by directing the IRA custodian to pay the distribution, up to a maximum of $100,000, directly to the receiving charity from an IRA account that is subject to required minimum distributions, i. e., the owner is over age 70-1/2. The advantage to the IRA owner is that the QCD amount is not included in their income for the year, but does count towards their total RMD. Since the QCD is excluded from the owner's income, they cannot take a charitable deduction for the amount. Obviously, some tax planning is required to see if a QCD is appropriate for the taxpayer.