Distribution Rules and Taxation: Events, Forms, and Withholding
When distributions may occur
Distributions are permitted only on triggering events defined in the plan and the Code: termination of employment, attainment of normal retirement age, death, disability, plan termination, and - for some plans - hardship or in-service withdrawals at specified ages. Candidates must know which events apply to which money types: elective deferrals are the most restricted, while employer contributions and rollover money may be distributable earlier.
Forms of payment and spousal rights
Know the required forms: a qualified joint and survivor annuity in defined benefit and money purchase plans, and the spousal consent rules that apply when a participant elects another form or a nonspouse beneficiary. In defined contribution plans, the automatic rollover rules apply to small balances.
Taxation and withholding
Tax questions test the difference between eligible rollover distributions and other payments. Eligible rollover distributions are subject to mandatory 20% federal withholding unless directly rolled over; non-eligible payments follow different withholding. Early distributions before age 59½ generally carry an additional 10% tax unless an exception applies (e.g., separation from service at or after age 55 for qualified plans, disability, qualified birth or adoption, and others). Required minimum distributions must begin by the statutory deadline, and the penalty for missed RMDs is steep.
Traps
Watch for questions that apply the age-55 separation exception to IRAs (it does not) or that treat a direct rollover as taxable. Another trap: assuming a hardship withdrawal is tax-free - it is taxable and generally penalty-exposed unless an exception applies.
Rule of thumb
Ask two questions in order: (1) Is this an eligible rollover distribution? (2) Is an early-distribution exception available? The answers drive withholding and the 10% tax.