Distributions to plan participants or beneficiaries, if the terms of the plan permit, can be made in several ways.
Distribution types. The typical types of distribution choices are:
- Lump sum: this form of payout distributes the entire vested balance in one payment.
- Installments: this alternative offers a flexible payout period and equal or unequal payouts.
- Annuities: usually paid under a contract, this alternative makes regular distributions. Larger plans may provide annuity distributions from the fund itself. Types of annuities are:
- Fixed period: distributions are made at regular intervals and have a predetermined amount and period of duration
- Single life: distributions are made at regular intervals, but payouts end at the date of death
- Joint and survivor: the first annuitant receives a predetermined amount at regular intervals for life. After his or her death, the survivor receives a predetermined amount at regular intervals for life, which can be the same as, or different from, the original amount
- Variable: distributions may fluctuate as a function of profits or economic indices, but the payout period is either fixed in duration or set only for the recipient's life.
Distribution events. Distributions can be made at termination of employment for any reason including death, dismissal, disability, or retirement. Distributions may also be allowed for medical expenses in excess of 7.5 percent of adjusted gross income. Profit-sharing plans allow withdrawals only after age 59 1/2.
Distribution timing. Distributions from all qualified plans must begin no later than April 1st of the calendar year following the year that the participant attains age 70 1/2, or the calendar year in which the employee retires. Special rules apply if the distribution is made to a 5 percent owner of the business.
Distribution amounts. Each year's minimum distribution is calculated by dividing the balance of the account at the beginning of the year by the life expectancy of the owner or joint life expectancies of the owner and a designated beneficiary. Life expectancy is determined using the annuity unisex life expectancy tables in the Internal Revenue Regulations.