Order Code RL31770
Individual Retirement Accounts and 401(k) Plans:
Early Withdrawals and Required Distributions
Updated October 27, 2008
Patrick Purcell
Specialist in Income Security
Domestic Social Policy Division

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Individual Retirement Accounts and 401(k) Plans:
Early Withdrawals and Required Distributions
Summary
In the interest of encouraging workers to save for retirement, Congress has
authorized several kinds of retirement savings plans that qualify for reduced or
deferred income taxes. These plans provide a financial incentive for people to save,
either by allowing workers and employers to deduct from income the amount they
contribute to the plan or to take tax-free distributions from the plan after they retire.
This CRS Report summarizes the provisions of law that govern the taxes applicable
to pre-retirement distributions from retirement accounts, and the situations in which
distributions must be taken from a plan in order to avoid a tax penalty.
Because tax-deductible contributions to retirement plans and deferral of taxes
on investment earnings reduce federal income tax collections, Congress has placed
limits on the amount that can be contributed to these plans each year. To assure that
the tax preferences granted to retirement accounts are used to promote retirement
income security rather than to subsidize transfers of wealth from one generation to
the next, federal law requires owners of retirement accounts that are funded with tax-
deductible contributions to begin taking required minimum distributions from the
accounts after they reach age 70½. Failure to take a required minimum distribution
will result in a tax penalty equal to 50% of the amount that should have been
distributed. Retirement plans that are funded with after-tax income — like the “Roth
IRA” — do not have required minimum distributions during the account owner’s
lifetime.
To discourage individuals from taking pre-retirement withdrawals from
retirement savings accounts, the Internal Revenue Code (I.R.C.) imposes a 10%
penalty on withdrawals taken before age 59½, which is levied in addition to any other
applicable income tax. Recognizing that some significant events might require
people to withdraw money from their retirement accounts earlier than expected,
Congress has provided in law for waiving the 10% early withdrawal penalty in some
situations. As with required distributions after age 70½, Roth IRAs have a special
rule with respect to early withdrawals. Because contributions to a Roth IRA must
consist entirely of income on which income tax has already been paid, qualified
distributions from a Roth IRA are not subject to income taxes or penalties.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Kinds of Retirement Savings Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Contribution Rules: Putting Money into a Retirement Account . . . . . . . . . . . . . . 2
Contribution Rules for Traditional IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Contribution Rules for Roth IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Converting a Traditional IRA to a Roth IRA . . . . . . . . . . . . . . . . . . . . . 4
Contribution Rules for Employer-Sponsored Plans . . . . . . . . . . . . . . . . . . . . 4
Distribution Rules: Withdrawing Money from a Retirement Account . . . . . . . . . 6
Additional Tax on Early Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Special Rules for Traditional IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Early Withdrawals Without Penalty: “Substantially Equal
Periodic Payments” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Minimum Distribution Method . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Amortization Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Annuitization Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Revenue Ruling 2002-62 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Required Minimum Distributions (RMDs) . . . . . . . . . . . . . . . . . . . . . . . . . 11
How Many People Are Subject to RMDs? . . . . . . . . . . . . . . . . . . . . . 14
Proposed Moratorium on RMDs for 2008 . . . . . . . . . . . . . . . . . . . . . . 14
Plan Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Hardship Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Roth IRA Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Tables
Table 1. Number of Households Headed by Persons Aged 70 or Older
with an IRA or 401(k) Account in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Individual Retirement Accounts and
401(k) Plans: Early Withdrawals
and Required Distributions
Introduction
In the interest of encouraging workers to save for retirement, Congress has
authorized the creation of several kinds of retirement savings plans that qualify for
reduced or deferred income taxes. These plans provide a financial incentive for
people to save, either by allowing workers and employers to deduct from income the
amount they contribute to the plans or to take tax-free distributions from the plans
after they retire. This CRS Report summarizes the provisions of federal law that
govern the taxes applicable to pre-retirement distributions from retirement accounts
and the situations in which distributions must be taken in order to avoid a tax penalty.
Because tax-deductible contributions to retirement plans and deferral of taxes
on investment earnings reduce federal income tax collections, Congress has placed
limits on the amount that employers and employees can contribute to these plans each
year. As the Government Accountability Office has noted, “these limits exist to
prevent partial public subsidies of excessively large retirement benefits through tax
preferences.”1 To ensure that the tax preferences granted to retirement accounts are
used to promote retirement income security rather than to subsidize transfers of
wealth from one generation to the next, Congress has required distributions from
retirement accounts that are funded with tax-deductible contributions to begin when
the account owner reaches age 70½. A taxpayer who does not take a required
minimum distribution is subject to a tax penalty equal to 50% of the amount that
should have been distributed. If these distributions were not required, the temporary
tax deferrals that Congress has authorized to encourage retirement saving would
become permanent tax exemptions for those whose income from other sources is
high enough that they do not need to take withdrawals from their retirement savings
to help pay their living expenses. Retirement plans that are funded with after-tax
income — like the “Roth IRA” — do not have required distributions during the
account owner’s lifetime.
To discourage individuals from taking pre-retirement withdrawals from
retirement savings accounts, the Internal Revenue Code (I.R.C.) imposes a 10%
additional tax on withdrawals taken before age 59½. This penalty is levied in
addition to regular income taxes. Recognizing that some significant events might
require people to withdraw money from their retirement accounts earlier than
1 Private Pensions: Issues of Coverage and Increasing Contribution Limits for Defined
Contribution Plans, GAO-01-846, September 2001, p. 1.

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expected, Congress has provided in law for waiving the 10% early-withdrawal
penalty in some situations. As with required minimum distributions, Roth IRAs have
a special rule with respect to early withdrawals. Because contributions to a Roth IRA
consist entirely of income on which income tax has already been paid, the full
amount of Roth IRA contributions can be withdrawn at any time without being
subject to additional income taxes or an early withdrawal penalty. Investment
earnings on a Roth IRA are free of income taxes and penalties if withdrawn at least
five years after the account was established and the account owner has reached age
59½.
Kinds of Retirement Savings Plans
There are several kinds of retirement savings plans, the most common of which
are individual retirement accounts (IRAs) and the employer-sponsored plans that are
authorized under section 401(k) of the Internal Revenue Code. There are two types
of individual retirement account: the “traditional IRA,” authorized by Congress in
1974, and the “Roth IRA,” which Congress authorized in 1997. The two types of
IRA differ in the tax treatment of both contributions and distributions. In a
traditional IRA, contributions may be tax-deductible (up to legal limits). Investment
earnings accrue on a tax-deferred basis. Distributions from the plan are taxed as
ordinary income.2 Contributions to a Roth IRA are not tax-deductible; however,
qualifying distributions from a Roth IRA are tax-free. The tax treatment of a 401(k)
plan is similar to that of a traditional IRA: contributions (up to legal limits) are
excluded from income and investment earnings accrue on a tax-deferred basis.
Distributions from the plan are taxed as ordinary income. The Economic Growth and
Tax Relief Reconciliation Act of 2001 (P.L. 106-17) authorized a “Roth 401(k)”
beginning in 2006. Like the Roth IRA, Roth contributions to a 401(k) plan are made
on an after-tax basis, and qualified distributions from the plan are tax-free.
Contribution Rules: Putting Money into a
Retirement Account
Contribution Rules for Traditional IRAs
In 2008, a worker can make a tax-deductible contribution of $5,000 (or annual
earnings, if less) to a traditional IRA if he or she is under age 70½ and neither the
worker nor his spouse is covered by an employer-sponsored retirement plan. Workers
age 50 and older can make an additional “catch-up” contribution of $1,000. For an
unmarried worker who is covered by an employer-sponsored retirement plan, the
deduction for tax year 2008 phases out between $53,000 and $63,000 of modified
adjusted gross income.3 For a married worker who is covered by a plan at work, the
2 Income is classified as either “ordinary income” or “capital gains.” For tax year 2008, the
top marginal tax rate on ordinary income is 35%. The top rate on capital gains is 15%.
3 Modified AGI is adjusted gross income plus income from education savings bonds, interest
paid on education loans, employer-provided adoption assistance benefits, IRA deductions,
(continued...)

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CRS-3
maximum deductible contribution for tax year 2008 phases out between $85,000 and
$105,000 of modified A.G.I. For a married worker who files a joint return and does
not have an employer-sponsored retirement plan, but whose spouse is covered by an
employer’s plan, the maximum deductible contribution phases out between $159,000
and $169,000 of modified A.G.I.
If an individual is not eligible to make a deductible contribution to a traditional
IRA, he or she may be eligible to make a nondeductible contribution. In that case,
a portion of each future distribution will represent a return of the account owner’s
nondeductible contributions, which will not be included in the taxpayer’s taxable
income. The sum of these after-tax contributions is called the account “basis.”
Assuming that the account balance exceeds the sum of all nondeductible
contributions (i.e., the account basis), a portion of each distribution will represent
investment earnings, which will be included in taxable income. There is no upper
income limit for people who can make nondeductible contributions to a traditional
IRA, but contributions cannot be made after age 70½, the age at which federal law
requires distributions from a traditional IRA to begin. The required distributions must
be sufficient to fully distribute the account over the expected life of the account
owner or the joint life expectancy of the owner and his or her designated beneficiary.
If a traditional IRA has been funded all or in part by after-tax contributions, the
after-tax contributions are deemed by the IRS to be a pro rata share of any
distribution from the account. The account owner cannot declare all of the
distribution to consist entirely of after-tax contributions, and therefore not subject to
the income tax. If an individual owns more than one traditional IRA and any of them
have been funded with after-tax contributions, a distribution from any of the accounts
will be treated as consisting partly of after-tax contributions.
Contribution Rules for Roth IRAs
The Taxpayer Relief Act of 1997 (P.L. 105-34) authorized a new kind of
retirement savings account — the “Roth IRA” — named for former Senator William
Roth of Delaware. The distinguishing characteristics of the Roth IRA are that (1)
contributions can be made at any age, (2) no distributions from the plan are required
during the account owner’s lifetime and (3) contributions to the account are not tax-
deductible, but qualifying distributions from the account are tax-free. Only
individuals whose income is below thresholds defined in law are eligible to
contribute to a Roth IRA. For single tax filers, the maximum permissible contribution
to a Roth IRA in 2008 phases out for those with modified adjusted gross income
between $101,000 and $116,000. For married couples filing jointly, the maximum
permissible contribution to a Roth IRA phases out between $159,000 and $169,000
of annual income.4 For married persons filing separately, the contribution limit
phases out between $0 and $10,000 of income. The total annual limit on
3 (...continued)
deductions for qualified higher education expenses, and some other adjustments.
4 The income limit for converting a traditional IRA to a Roth IRA is lower. In tax years
before 2010, if modified adjusted gross income (AGI) exceeds $100,000 for either a single
filer or a married couple, then a traditional IRA cannot be converted to a Roth IRA.

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contributions to all of an individual’s IRAs (traditional deductible, traditional
nondeductible, and Roth) is $5,000 in 2008 (or $6,000 for individuals age 50 and
over). The contribution limit in future years will be indexed to the rate of inflation,
as measured by the Consumer Price Index, in $500 increments.
Because all contributions to a Roth IRA are made with after-tax income, the full
amount of contributions (the account basis) can be withdrawn tax-free at any time.
Distributions from a Roth IRA are deemed to come from contributions first, from
“rollovers”second,5 and account earnings last. Thus, distributions from a Roth IRA
are deemed to consist entirely of after-tax contributions until the full amount of those
contributions has been withdrawn. This assures that the account owner can withdraw
the full amount that he or she has contributed without having to pay additional taxes
or early withdrawal penalties on that amount
Distributions from a Roth IRA that exceed the account basis are taxable unless
they are qualified distributions. These distributions also may be subject to a l0%
additional tax if made before age 59½. Distributions that occur after the account
owner has reached age 59½ and at least five years after the account was established
are qualified distributions. Qualified distributions from a Roth IRA are tax-free.
Converting a Traditional IRA to a Roth IRA. A traditional IRA can be
converted to a Roth IRA, but a Roth IRA cannot be converted to a traditional IRA.
Until 2010, only taxpayers with A.G.I. of $100,000 or less (except those who are
married and filing separately) can convert a traditional IRA to a Roth IRA.6 The
immediate consequence of converting a traditional IRA to a Roth IRA is that income
tax must be paid on the entire amount that is converted, except for any amount that
represents after-tax contributions. Any amount that is subject to income tax when a
traditional IRA is converted to a Roth IRA must remain in the Roth IRA for at least
five years — or until the account owner reaches age 59½, if earlier — or it will be
subject to the 10% additional tax on early distributions. If a distribution occurs less
than five years after the conversion, the amount that was taxable in the year of the
conversion will be subject to the 10% early withdrawal penalty unless the account
owner has reached age 59½.7
Contribution Rules for Employer-Sponsored Plans
Under section 401 of the Internal Revenue Code, employers can establish
retirement plans that qualify for beneficial tax treatment, including a tax deduction
for employer contributions and deferral of income taxes on employee contributions
and investment earnings. Section 401(k) allows employers to establish plans in
which employees can choose to take their compensation in cash or to defer part of it
in the form of a contribution to a retirement plan — called an “elective deferral.”
5 A “rollover” is a deposit that came directly from another tax-qualified retirement account.
6 P.L. 109-222 (May 16, 2006) repealed the $100,000 income limit for converting a
traditional IRA to a Roth IRA beginning in 2010.
7 Distributions that occur after five years have passed and after age 59½ are “qualified
distributions” and are not subject to either ordinary income taxes or tax penalties.

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These plans — popularly known as 401(k) plans — are referred to in the tax code as
“cash or deferred arrangements.” Non-profit educational and cultural organizations
can offer similar retirement plans under I.R.C. §403(b). State and local governments
and tax-exempt organizations can offer deferred compensation arrangements under
I.R.C. §457. Although the plans authorized under I.R.C. §401(k), §403(b), and §457
differ from each other in some respects, effective with the Economic Growth and Tax
Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16), balances in one type of
plan generally can be rolled over into either of the others, or into an IRA.
The maximum permissible employee salary deferral under a 401(k) plan in 2008
is the lesser of $15,500 or 100% of compensation.8 Under the terms of the Economic
Growth and Tax Relief Reconciliation Act, the maximum deferral in years after 2006
is indexed to inflation. The maximum salary deferral in 2009 will be $16,500.
Participants aged 50 or over can make additional “catch-up” deferrals of up to $5,000
in 2008. The maximum annual addition to a defined contribution plan — the sum
of employer and employee contributions — is the lesser of $46,000 or 100% of
compensation in 2008.9 This limit is indexed to the Consumer Price Index (CPI) in
$1,000 increments. The annual contribution limits and the minimum distribution
rules for §403(b) plans are the same as for 401(k) plans. Since January 1, 2006,
participants in 401(k) and 403(b) plans have been permitted to elect “Roth” treatment
for their contributions, if their plan chooses to permit them to do so. Such
contributions are made on an after-tax basis, but qualified distributions from the
account are tax-free. There is no required minimum distribution from a Roth 401(k)
during the employee’s lifetime or that of the employee’s spouse, but any beneficiary
other than the account owner’s spouse is subject to required minimum distributions.
State and local governments and tax-exempt organizations can establish
deferred compensation arrangements under I.R.C. §457.10 Participants’ contributions
to these plans are excluded from income, and plan earnings are tax-deferred until
withdrawal. The maximum permissible contribution to a §457 plan is the lesser of
100% of compensation or $15,500 in 2008.11 Participants in §457 plans can make
additional contributions of up to twice the standard amount in the last three years
before normal retirement age. Participants who are 50 or older can make additional
“catch-up” contributions of up to $5,000 in 2008. The EGTRRA of 2001 repealed the
rules that coordinated the maximum annual employee contribution to a §457 plan
with the contribution limits for other types of plans. Consequently, an employee who
participates in a §457 plan and who also participates in either a §403(b) or a §401(k)
plan is permitted to contribute up to $15,500 to each plan in 2008. Section 457 plans
also are subject to a special rule with respect to distributions. These plans are not
subject to the 10% penalty for withdrawals before age 59½, provided that the
withdrawal occurs upon retirement or termination of employment.
8 26 U.S.C. §402(g).
9 26 U.S.C. §415(c). The maximum annual addition to a DC plan in 2009 will be $49,000.
10 Tax-exempt organizations are described in I.R.C. §501(c)(3).
11 26 U.S.C. §457(e).

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Distribution Rules: Withdrawing Money
from a Retirement Account
Additional Tax on Early Distributions
Section 72(t) of the Internal Revenue Code applies a tax equal to 10% of the
amount distributed from a “qualified retirement plan.”12 The 10% additional tax is
levied in addition to regular income taxes unless the distribution from the retirement
plan is made:
(1) after the plan participant has reached age 59½;
(2) to a beneficiary after the death of the participant;
(3) because the participant has become disabled;
(4) to an alternate payee under a qualified domestic relations order (QDRO);13
(5) to an employee who has separated from service under an early retirement
arrangement after reaching age 55;14
(6) as dividends paid from an Employee Stock Ownership Plan (ESOP);
(7) through an IRS levy to collect back taxes owed by the plan participant;
(8) to pay medical expenses of the plan participant, a spouse, or dependent, but
only to the extent that they exceed 7.5% of adjusted gross income; or
(9) as part of a series of substantially equal periodic payments (SEPPs) over the
life of the participant or the joint lives of the participant and a designated
beneficiary.
Special Rules for Traditional IRAs. Two of the exceptions to the 10%
penalty apply only to employer-sponsored plans, and not to individual retirement
accounts. These are distributions to an alternate payee under a QDRO and
distributions to a worker who has retired after reaching age 55 but before age 59½.
There are, however, three additional exceptions to the 10% early withdrawal penalty
that apply only to IRAs. Distributions from an individual retirement account made
before age 59½ are not subject to the 10% early withdrawal penalty if the
distributions are used:
! to pay health insurance premiums during a period of unemployment;
! to pay for qualifying post-secondary educational expenses; or
! to pay up to $10,000 of the cost of purchasing a first home.
12 A qualified retirement plan is defined in statute at 26 U.S.C. §4974(c) as: “(1) a plan
described in section 401(a) which includes a trust exempt from tax under section 501(a), (2)
an annuity plan described in section 403(a), (3) an annuity contract described in section
403(b), (4) an individual retirement account described in section 408(a), or (5) an individual
retirement annuity described in section 408(b).”
13 A Qualified Domestic Relations Order divides the assets of a couple at divorce. The
alternate payee is usually a former spouse and/or a minor dependent of the divorced couple.
14 The individual is not prohibited from being employed, or even from returning to work for
the same employer, but there must be a period of separation that began after age 55.

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There are restrictions on each of these three exceptions. The exception for
paying health insurance premiums applies only if the account owner (1) has received
unemployment compensation for at least 12 consecutive weeks, (2) receives the
distribution either in the same year that unemployment compensation was received
or in the following year, and (3) receives the distribution no later than 60 days after
returning to work.
The exception for higher-education expenses applies to either the account owner
or the account owner’s spouse, child, or grandchild, but only if (1) the distribution
is used to pay for tuition, fees, books, supplies, equipment, or room and board, and
(2) the distribution is no greater than the sum of eligible expenses, minus the amount
of any tax-free assistance or scholarships that the student receives, excluding loans,
gifts, or inheritances.
For purposes of the exception to the 10% early withdrawal penalty, a “first-time
home buyer” is defined as someone who did not own (and whose spouse did not
own) a principal residence in the two years preceding the distribution from the
account. The exception for a first-home purchase has a lifetime limit of $10,000.
The distribution must be used to purchase, build, or re-build the principal residence
of the account owner, the account owner’s spouse, or the parent or grandparent, or
the child or grandchild of the account owner or the account owner’s spouse. In
addition, the distribution must be used within 120 days or else rolled over into
another IRA.
Early Withdrawals Without Penalty:
“Substantially Equal Periodic Payments”
Section 72(t) of the Internal Revenue Code states that, if distributions from a
qualified retirement plan made before age 59½ are “part of a series of substantially
equal periodic payments,” they are not subject to the 10% penalty that otherwise
would apply.15 Under this exception to the 10% early withdrawal penalty, an
account owner can begin taking distributions from a retirement plan at any age;
however, these distributions can be taken only from a plan sponsored by a former
employer or from an IRA. The distributions also:
(1) must be paid at least once each year;
(2) must be based on the life expectancy of the plan participant or the joint life
expectancy of the participant and a designated beneficiary; and
(3) must not be modified before the later of five years after the first distribution
or the date on which the plan participant reaches age 59½.
The Internal Revenue Service has defined in regulation the forms of distribution
that it will consider to be “substantially equal periodic payments” and therefore will
not be subject to the 10% tax penalty otherwise applicable to early withdrawals.16
15 26 U.S.C. §72(t)(2)(A)(iv).
16 I.R.S. Notice 89-25 (March 20, 1989) and Revenue Ruling 2002-62 (October 3, 2002).

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The IRS has approved three methods for calculating substantially equal periodic
payments. They are
! the minimum distribution method, also called the life expectancy
method;
! the amortization method, which amortizes an account balance using
life expectancy tables and a “reasonable” interest rate; and
! the annuitization method, which divides the account balance by an
annuity factor based on a “reasonable” mortality table and interest
rate.
For any individual, each of the three methods may produce a different
distribution amount. As its name implies, the minimum distribution method will
usually result in the smallest annual distribution. It is also the only one of the three
methods in which the amount of the distribution is likely to vary from year to year.
The distribution amount varies both because of changes in the remaining account
balance and changes in the account owner’s remaining life expectancy. The
amortization method and the annuitization method usually produce distributions that
are similar in size because the same economic and demographic variables determine
the distribution amounts under both of these methods. The distribution amount is
calculated annually under the minimum distribution method. Under the amortization
and annuitization methods, this calculation is typically performed only before the first
distribution and then remains unchanged from year to year.
One way to receive a larger annual distribution than would result from the
minimum distribution method, but smaller than the distribution produced by either
of the other two methods, is to “segment” one’s retirement accounts into two or more
IRAs. Distributions can then be taken from one (or more) of them while leaving the
others intact. According to one authoritative source, “IRS rulings have consistently
allowed taxpayers to take periodic payments from one or more plans and not
others.”17
The Minimum Distribution Method. Under the minimum distribution
method, the annual distribution in any year is determined by dividing the account
balance for that year by the account owner’s remaining life expectancy, (or the joint
life expectancy of the account owner and his or her designated beneficiary) as
published in a life expectancy table that has been approved by the IRS. Because the
account balance and the account owner’s remaining life expectancy both change from
year to year, the distribution amount also will change each year under this method.
Although the amount of the distribution will change each year under the
minimum distribution method, the IRS treats the resulting distributions as
substantially equal periodic payments for purposes of section 72(t). Once the
distributions have begun, however, the account owner may neither stop receiving
payments nor switch to one of the other two methods until the later of (1) five years
after the first distribution or (2) the date on which the plan participant reaches age
17 Twila Slesnick and John C. Suttle, IRAs, 401(k)s, and Other Retirement Plans: Taking
Your Money Out, Fourth Edition, (2002), page 4/4.

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59½. Terminating or altering the distributions before the later of these two dates will
result in a penalty of 10% (plus interest) being levied retroactively on all distributions
that have been made from the plan.
The Amortization Method. Under the amortization method, the amount of
the annual distribution is based on the account owner’s remaining life expectancy in
the year of the first distribution and a “reasonable” rate of interest. (If the account
owner has a designated beneficiary, the distribution is based on their joint life
expectancy in the year of the first distribution.) Under this method, the account
balance and remaining life expectancy are determined only for the first distribution
year. The annual distribution is the same amount in each succeeding year. The risk
to the account owner who chooses the amortization method is that a declining
account balance might result in the account being exhausted in fewer years than he
or she had expected when the distributions began.
The Annuitization Method. Under the annuitization method, the distribution
amount is determined by dividing the account balance by an annuity factor. This
factor represents the present value18 of an annuity of $1 per year beginning at the
taxpayer’s current age and continuing for the life of the account owner (or the joint
lives of the account owner and a designated beneficiary). The annuity factor must be
derived from life expectancy tables published by the Internal Revenue Service and
an interest rate that does not exceed 120% of the federal mid-term rate.19 Under this
method, the account balance, the annuity factor, and the interest rate are determined
only once, for the first distribution year. The resulting annual payment is the same
amount in each succeeding year. In private letter rulings, the IRS generally has
allowed the distribution amount to be adjusted annually to account for changes in life
expectancy and account balance. The IRS also has issued private letter rulings that
allow the annual distribution to be increased for inflation. A private letter ruling,
however, applies only to the individual who requested it. These rulings cannot be
relied upon by other taxpayers as legally binding statements of IRS policy.
Examples. Consider a 55-year-old unmarried individual with no designated
beneficiary who wishes to begin taking substantially equal periodic payments in
October 2008. The two relevant variables for determining the distribution amount
under the minimum distribution method are the account balance and the account
owner’s remaining life expectancy, which for a 55-year-old is 29.6 years.20 If we
18 A present value is the lump-sum equivalent of a series of payments or stream of income.
The present value of future income depends on the length of time over which the income
will be received and the interest rate at which the income is discounted to the present.
19 The current federal mid-term rate can be found on the IRS website at[http://www.irs.gov/
taxpros/lists/0,,id=98042,00.html].
20 IRS Publication 590, Appendix C, Table 1. In Arizona Governing Commission for Tax
Deferred Annuity & Deferred Compensation Plans v. Norris, 463 U.S. 1073 (1983), the
Supreme Court held that an employer-sponsored plan using sex-segregated life expectancy
tables to calculate annuity payments had violated Title VII of the Civil Rights Act of 1964.
As a result of this decision, annuities paid from employer sponsored retirement plans must
use “unisex” life tables. The ruling does not apply to individually purchased annuities,
(continued...)

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CRS-10
assume an account balance of $100,000 on September 30, 2008, the first-year
distribution would be $3,378, which is derived by dividing the account balance by
the individual’s remaining life expectancy. In each succeeding year, the annual
distribution amount would be determined by the same process — dividing the
remaining account balance (which may have increased or decreased depending on
investment returns) by the individual’s remaining life expectancy, which will
decrease each year. Because the minimum distribution method takes into account
changes in both the account balance and remaining life expectancy, the annual
distribution amount will change from year to year under this method.
Under the amortization method, the annual distribution for an individual in the
circumstances described above would be $5,824.21 The annual distribution under
this method is determined the same way that a loan repayment is calculated. The
account balance is analogous to the principal of the loan, the term is the person’s
remaining life expectancy in the year that the first distribution is made, and the
interest rate is equal to or less than 120% of the mid-term federal interest rate in
either of the two months immediately preceding the first distribution. Under the
amortization method, the amount of the annual distribution is determined once,
before the first distribution, and it remains the same from year to year.
Under the annuitization method, the annual distribution for an individual in the
circumstances described above also would be $5,824.22 The variables that determine
the annual distribution under the annuitization method are, as under the amortization
method, the individual’s remaining life expectancy and an interest rate. As a result,
the distribution amounts under these two methods are likely to be nearly the same,
provided that similar interest rates are used. The distribution amount is easier to
compute under the annuitization method because the interest rate and life expectancy
factors have been combined into a single number called an annuity factor. There is
a single annuity factor for each possible combination of interest rate and term (life
expectancy). These factors are readily available in published sources such as
McGraw-Hill’s Compound Interest Annuity Tables and Archer’s Compound Interest
and Annuity Tables. To find the annual distribution amount, the account balance is
simply divided by the annuity factor appropriate to the individual’s age and the
applicable rate of interest.
Revenue Ruling 2002-62
Both the amortization method and the annuitization method of calculating
substantially equal periodic payments result in distribution amounts that are constant
from year to year and that are larger than the initial distribution that results from the
minimum distribution method. In October 2002, the Internal Revenue Service
released Revenue Ruling 2002-62, which allows taxpayers to make a one-time switch
20 (...continued)
which may use gender-specific life tables.
21 Amount is based on an interest rate of 4.0% and a remaining life expectancy of 29.6 years.
22 This is based on an annuity factor of 17.1687. For the annuity factors used, see
[http://www.studyfinance.com/common/table4.pdf].

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CRS-11
from either the amortization method or the annuitization method to the minimum
distribution method of calculating the annual distribution from their retirement plans.
The smaller distributions that result from this switch will prevent retirement accounts
from being depleted as rapidly as would occur under either of the other two methods.
Revenue ruling 2002-62 also states that
! If an account owner takes periodic payments (SEPPs) and his or her
account is exhausted before age 59½, the IRS will not treat this as
a “modification” of the method of distribution and will not assess the
10% penalty and retroactive interest changes that otherwise would
be levied.
! An interest rate of up to 120% of the federal mid-term rate for either
of the two months immediately preceding the month in which the
distribution begins can be used under either the amortization or
annuity methods.
! A distribution can be based on the account balance on December 31
of the previous year or any date in the current year prior to the first
distribution. In subsequent years, under the minimum distribution
method, the distribution can be based on the value either on
December 31 of the prior year or on a date within a reasonable
period before that year’s distribution.
! Distributions can be based on any one of the three life expectancy
tables published by the IRS in Publication 590. (The Single Life
Expectancy table yields the highest annual distribution). Also, a new
mortality table for the annuity method, published in Appendix B of
Revenue Ruling 2002-62, must be used for SEPPs starting on or
after January 1, 2003. The new tables reflect increases in life
expectancy and decreasing mortality.
Required Minimum Distributions (RMDs)
In order to encourage employers to sponsor retirement plans and employees to
participate in these plans, Congress has amended the Internal Revenue Code to (1)
allow employer contributions to qualified retirement plans to be treated as tax-
deductible business expenses, (2) exclude employer contributions to retirement plans
and investment earnings on those plans from employee income, and (3) permit
qualifying employee contributions to individual retirement accounts and certain
employer-sponsored plans to be excluded from taxable income in the year the
contribution is made and to exclude investment earnings on these contributions from
annual income. These contributions and investment earnings are taxed when the
retirement account is distributed to the plan participant, usually during retirement.
To ensure that tax-deferred retirement accounts that have been established to
provide income during retirement are not used as permanent tax shelters or as
vehicles for transmitting wealth to heirs, Congress has required plan participants to
begin taking distributions from these plans no later than April 1 of the year after they

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CRS-12
reach age 70½.23 Participants in employer-sponsored plans who are still working at
age 70½ can delay distributions until April 1 of the year after they have retired. This
exception does not apply to traditional IRAs.24 In a traditional IRA, the required
beginning date for distributions is always April 1 of the year after the participant
reaches age 70½. The distributions must be made over the life expectancy of the plan
participant, or over the joint life expectancy of the plan participant and his or her
designated beneficiary. Failure to take a required distribution will result in a tax
penalty equal to 50% of the amount that should have been distributed.25
The tax code requires that either the entire retirement account balance must be
distributed by the required beginning date, or that distributions must have begun by
that date with the amount of the distributions based on the remaining life expectancy
of the account owner (or the joint life expectancy of the account owner and a
designated beneficiary.)26 For most participants in employer-sponsored plans, the
“required beginning date” for distributions is April 1 of the calendar year following
the later of (1) the year in which the plan participant reaches age 70½, or (2) the year
in which he or she retires.27 If the plan participant owns 5% or more of the company,
however, the required beginning date is always April 1 of the year after the
participant reaches age 70½, regardless of whether he or she has retired.
If required minimum distributions have begun but the account owner dies before
the entire account balance has been distributed, the remainder of the account must
be distributed at least as rapidly as under the distribution method that was being used
when the account owner died. The account must then be distributed over the
remaining life expectancy of the designated beneficiary, or if there is no designated
beneficiary, over a length of time equal to the remaining life expectancy of the
decedent in the year of his or her death.
If an account owner dies before the required distributions from the account have
begun and no beneficiary has been designated, the entire account balance must be
distributed within five years after the death of the account owner. Any amount that
is to be paid to a designated beneficiary can be distributed over his or her life
expectancy, provided that the distributions begin no later than one year after the date
of the account owner’s death. If the designated beneficiary is the surviving spouse
of the account owner, then the required beginning date for distributions is the date
on which the account owner would have reached age 70½.28 The account balance
for determining the amount of the required distribution each year is the balance on
23 26 U.S.C. §401(a)(9).
24 Distributions are not required from a Roth IRA during the account owner’s lifetime.
25 26 U.S.C. §4974.
26 Life expectancy may be redetermined annually. (See 26 U.S.C. §401(a)(9)(D)).
27 If a plan participant retires after reaching age 70½, the employee’s accrued benefit must
be actuarially increased to take into account the period after age 70½ in which the employee
was not receiving any benefits under the plan. (See 26 U.S.C. §401(a)(9)(C)(iii)).
28 Any distribution required under an incidental death benefit requirement is treated as a
required minimum distribution.

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the last valuation date in the year preceding the distribution.29 In most cases, this will
be December 31. A surviving spouse who is the sole designated beneficiary also has
the option to roll over the account into an IRA in his or her own name. In that case,
the surviving spouse generally will have to wait until age 59½ to begin taking
distributions, just as if the IRA had always been in the surviving spouse’s name.
Section 634 of the Economic Growth and Tax Relief Reconciliation Act of 2001
(P.L. 107-16) directed the Secretary of the Treasury to modify the life expectancy
tables under the regulations relating to required minimum distributions so that the
tables reflect current life expectancy. The IRS issued the required regulations on
April 17, 2002.30 The new regulations incorporate life tables that reflect increases in
life expectancy since the 1980s, when the tables were last published. Consequently,
the minimum required annual distribution is smaller than under the old life tables,
because an account balance now will be distributed over a longer expected life span.
Required distributions do not compel account owners to sell the stocks, bonds,
or other assets in which a retirement account is invested. The law requires funds to
be withdrawn from the retirement account and income taxes paid on the amount
withdrawn, but this requirement this does not require assets to be sold. Stocks, for
example, can be transferred from an IRA to a regular brokerage account. If assets
that have been transferred from a retirement account to a regular account later
increase in value, the increase will be taxed as capital gains, which are taxed at lower
rates than ordinary income. If the age at which distributions are required were to be
pushed beyond age 70½, future distributions would probably be larger because
required distributions are based on both the account value and the account owner’s
remaining life expectancy. For any given account balance, a required distribution
beginning at age 75, for example, would be greater than a distribution beginning at
age 71, because the account owner will have a shorter remaining life expectancy.
Larger annual distributions could push some retirees into higher tax brackets.
Eliminating required distributions altogether would, of course, provide account
owners with the maximum freedom of choice about when to take distributions from
their accounts.31 The accounts eventually would be subject to taxation because,
under current law the designated beneficiary usually is required to take withdrawals
over his or her life expectancy. Some accounts also might be subject to the estate
tax. In fact, extending the tax deferral period would benefit only those account
owners whose income from other sources is sufficient to allow them to postpone
withdrawals from their retirement accounts. Retirees who need to take distributions
from their retirement accounts to supplement their retirement income, rather than
because they are required by law to do so, would not benefit from delaying or
eliminating the beginning date for required distributions. Lower and middle-income
retirees who need to take distributions to support themselves in retirement would still
29 26 C.F.R. §1.401(a)(9)-5, published in the Federal Register, vol. 67 no. 4, April 17 ,
2002.
30 Federal Register, vol. 67 no. 74, April 17, 2002, pages 18988 to 19028.
31 Roth IRAs have no minimum distribution requirement during the account owner’s
lifetime. Roth IRAs are funded only with contributions on which income taxes have already
been paid. The investment earnings of a Roth IRA are available tax-free in retirement.

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CRS-14
have to take distributions from their accounts and pay income taxes on those
distributions, if their income is above the threshold for taxation.
One of the attractions of the Roth IRA is that no distributions are required from
these plans during the account owner’s lifetime. After the Roth IRA was authorized
by Congress in 1997, many owners of traditional IRAs converted their accounts to
Roth IRAs and paid income tax on the amounts that they converted. Some of those
who converted their traditional IRAs to Roth IRAs might be unhappy if Congress
were to eliminate required distributions from traditional IRAs. This would grant to
current IRA owners free of charge a benefit that others purchased by converting their
traditional IRAs to Roth IRAs and paying income taxes on the converted amounts.
How Many People Are Subject to RMDs? Required minimum
distributions from a traditional IRA or from a 401(k) account owned by a retired
worker must begin no later than April of the year after the account owner reaches age
70½. In 2005, an estimated 16.9 million households were headed by persons aged
70 and older, and 5.5 million (32.5%) of these households owned at least one IRA
or 401(k)-type retirement account. Of the 5.5 million households potentially subject
to required minimum distributions in 2005, 2.9 million (53%) had retirement account
balances of less than $50,000, and 938,000 (17%) had balances of more than
$200,000. (See Table 1.) Almost 3.6 million (65%) of the households potentially
subject to RMDs had total income of less than $50,000 in 2005, whereas 415,000
households (7.6%) had total income of more than $100,000.
Table 1. Number of Households Headed by Persons Aged 70
or Older with an IRA or 401(k) Account in 2005
(Number of households, in thousands)
Total Household Retirement Account Balance
Under
$50,000 to $100,000 to
$200,000
$50,000
$99,999
$199,999
or more
Total
Age of Householder
70 to 79
1,992
667
597
715
3,971
80 or older
915
245
140
223
1,524
Household Income
Under $50,000
2,074
633
345
534
3,586
$50,000-$99,999
699
225
279
291
1,494
$100,000 or more
135
54
114
112
415
Total
2,908
912
737
938
5,495
Source: Bureau of the Census, Survey of Income and Program Participation.
Note: Total household retirement account balance is the sum of all individual retirement account
balances and defined contribution plan balances of all members of the household.
Proposed Moratorium on RMDs for 2008. According to statistics
compiled by the Federal Reserve Board, investments in private-sector defined
contribution plans at year-end 2007 totaled $3.5 trillion, of which $2.7 trillion (77%)

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CRS-15
was invested in corporate equities and mutual fund shares. Investments in individual
retirement accounts totaled $4.7 trillion, of which $3.7 trillion (79%) was invested
in corporate equities and mutual fund shares. Through the close of business on
October 24, 2008, the Standard & Poor’s 500 index of common stocks had fallen by
40% for the year, greatly reducing the value of many IRAs and 401(k) accounts.
Individuals who fail to take required distributions from a retirement account are
subject to a tax penalty equal to 50% of the required distribution. On October 10,
2008, Representative George Miller, chairman of the House Committee on Education
and Labor, wrote to U.S. Treasury Secretary Henry Paulson and asked that he
suspend for 2008 the tax penalty for persons over age 70½ who do not take a
minimum withdrawal from their individual retirement account or 401(k) plan.32 On
October 21, an official of the Treasury Department stated that “Treasury has been
urged to look at ways to change [the distribution requirement] administratively, and
we are looking at ways to change” the relevant regulations.33
Plan Loans
The Internal Revenue Code allows participants in employer-sponsored plans to
borrow from their accounts, but plans are not required to allow such loans. A loan
cannot exceed the greater of $10,000 or 50% of the participant’s vested account
balance. In no case may it exceed $50,000. A loan from a retirement plan must be
paid back within five years at a “reasonable” rate of interest. If repayment ceases, the
IRS will treat the full amount of the loan as a distribution from the plan, and it will
be subject to income tax and possibly to an early distribution penalty. If the
employee separates from the employer before the loan is repaid, the full amount must
be repaid, or it will be treated as a distribution from the plan.34
Hardship Distributions
The tax code permits 401(k) plans — and no other kind of tax-qualified
retirement plan — to make distributions available “upon hardship of the employee.”35
Although the I.R.C. allows plans to make these distributions available, it does not
require them to do so. Federal regulations specify that a hardship distribution can be
made only on account of “an immediate and heavy financial need of the employee”
32 See [http://www.house.gov/apps/list/speech/edlabor_dem/10102008PensionRule.html].
33 Bureau of National Affairs, Inc., Pension & Benefits Daily, October 22, 2008.
34 Loans are not permitted from IRAs, but money in an IRA can, in effect, be “borrowed”
for 60 days because the law states that any distribution from an IRA that is not deposited in
the same or another IRA within 60 days is a taxable distribution. (26 U.S.C. § 408(d)).
35 26 U.S.C. §401(k)(2)(B)(i)(IV). It is not necessary for the tax code to include a provision
allowing hardship distributions from an IRA because a participant can always withdraw
money from an IRA. Such distributions are always taxable, except any portion that is
attributable to after-tax contributions. I.R.C. §72(t) describes the kinds of distributions made
before age 59½ that are exempt from the 10% additional tax on early distributions.

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CRS-16
and cannot exceed the amount of the employee’s previous elective contributions.36
Qualifying expenses include medical care for the participant and/or family members,
the purchase of a principal residence, college tuition and related expenses, expenses
to prevent eviction or foreclosure on a principal residence, and funeral expenses. The
distribution must be limited to the amount needed to meet the employee’s immediate
financial need plus any taxes that will result from the distribution. Employees are
prohibited by law from making contributions to a plan for a period of six months
after a hardship distribution. Hardship distributions are always subject to ordinary
income taxes, but if the distribution is used for a purpose specifically designated in
IRC section 72(t) the distribution will not be subject to the 10% early withdrawal
penalty, even if the plan participant is under age 59½.37
Roth IRA Distributions
Distributions of investment earnings from a Roth IRA are subject to regular
income taxes and early withdrawal penalties unless they are qualified distributions.
Qualified distributions are those that occur after age 59½ and more than five years
after the account was established. Investment earnings withdrawn from a Roth IRA
before age 59½ are subject to both regular income taxes and a 10% early-withdrawal
penalty. Distributions of investment earnings after age 59½ are not subject to the
early withdrawal penalty, but they are subject to regular income tax if the distribution
occurs less than five years after the account was established. Unlike a traditional
IRA, from which required minimum distributions must begin no later than April 1
of the year after the account owner reaches age 70½, there is no requirement for an
account owner to take distributions from a Roth IRA at any time during his or her
lifetime.
36 26 C.F.R. §1.401(k)-1(d).
37 Although the I.R.C. allows distributions to be made without penalty beginning at age
59½, many employer plans allow distributions only after the employee has left the employer.

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