Distribution Requirements

Qualified plans must begin distributing benefits when a participant reaches the normal retirement age unless the participant has been enrolled for fewer than 10 years (in which case distributions can be delayed until age 70½) or has not actually retired from the sponsoring firm. Distributions from a defined-contribution plan must be made over a period that does not exceed the combined life expectancy of the participant and his or her beneficiary. Lawmakers designed that provision to target the tax incentives associated with retirement plans toward encouraging the amount of saving that is actually needed to maintain an individual's income in old age.(1)

There are several alternatives to periodic distributions: all benefits may be distributed as a lump sum; they may be rolled over into an IRA (which would delay mandatory taxable distributions until age 70½); or they may be used to purchase an annuity contract. Until 2000, lump-sum distributions made after age 59½ or at death were eligible for favorable tax treatment. Those rules have now been repealed. Lump-sum distributions that are not rolled over into IRAs are now taxed as ordinary income. Hence, they may become less common than they were in the past.

1.  Recently proposed changes in minimum distribution rules would assume that a beneficiary was 10 years younger than the owner of the plan. Because beneficiaries are usually spouses who differ in age by fewer than 10 years, such a change would reduce minimum distributions for most recipients by spreading them over a longer period. The 109th Congress is also considering legislation to gradually raise to 75 the age at which distributions become mandatory.