A distribution check is a payment issued when money leaves a managed financial account, such as a 401(k), IRA, trust, or estate, and is sent directly to you or another designated recipient. What that check actually costs you depends on three things: the type of account it came from, your age when you take it, and whether you keep the money or move it into another qualified account within 60 days.
Where Distribution Checks Come From
Most distribution checks come from retirement accounts. Employer-sponsored plans such as 401(k)s, 403(b)s, and profit-sharing plans issue them, as do traditional IRAs, SEP IRAs, and SIMPLE IRAs.1U.S. Department of Labor. Types of Retirement Plans A payment is usually triggered by a specific event: reaching retirement age, leaving a job, becoming disabled, or a qualifying hardship.
Distribution checks also come from outside the retirement system. Estates issue them during probate when a deceased person’s assets pass to heirs. Legal settlement trusts pay compensatory damages to injured parties. And in divorce, retirement assets can be split and paid out under a court order called a Qualified Domestic Relations Order (QDRO).
The rules that follow are the ones that hit hardest for the most common case, which is a check from a retirement account. Sections further down cover the ways inherited, QDRO, Roth, settlement, and estate checks depart from those rules.
How Much Is Withheld Before You See the Money
The check that arrives is smaller than the gross distribution because the payer withholds federal income tax before mailing it. How much smaller depends on the account.
401(k), 403(b), and Other Employer Plans
When you take a distribution from an employer plan and have it paid directly to you, the plan administrator is required to withhold 20% for federal income tax.2Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions You cannot opt out. On a $10,000 gross distribution, you receive a check for $8,000; the other $2,000 goes to the IRS as a prepayment against your tax bill for the year.
IRAs
Traditional IRA, SEP IRA, and SIMPLE IRA distributions default to 10% federal withholding, but you can raise, lower, or eliminate that percentage by filing Form W-4R with the payer.3Internal Revenue Service. Pensions and Annuity Withholding The flexibility is useful, but it puts responsibility on you to make sure enough tax is paid by year-end to avoid an underpayment penalty.
State Tax
Many states also withhold state income tax from retirement distributions. Some require it whenever federal withholding applies; others withhold only if you request it; states without an income tax, such as Florida and Texas, do not withhold at all. Confirm your state’s rule with the plan administrator before the check goes out.
Withholding is a prepayment, not the final tax. The taxable portion of the distribution is added to your ordinary income for the year, and your actual bracket may leave you owing more or getting some back.
The 10% Early Withdrawal Penalty
If you take a distribution from a retirement account before age 59½, you generally owe a 10% additional tax on the taxable portion, on top of regular income tax.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions On a $10,000 early withdrawal, that penalty alone is $1,000, and it applies on top of the 20% or 10% already withheld.
Several exceptions eliminate the penalty:
- Distributions after the account owner’s death, or after the owner becomes totally and permanently disabled.
- A series of substantially equal periodic payments taken over your life expectancy.
- Separation from service during or after the year you turn 55, for distributions from that employer’s plan (employer plans only, not IRAs).
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
- First-time home purchase, up to $10,000 from an IRA (not employer plans).
- Qualified birth or adoption, up to $5,000 per child.
- Domestic abuse victim distributions, up to the lesser of $10,000 or 50% of the account balance.
- Federally declared disaster distributions, up to $22,000 for qualified individuals.
The exceptions apply differently to employer plans and IRAs, so check that the one you plan to rely on actually covers your account type.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Rolling the Check Into Another Retirement Account
If you don’t actually need the cash, you can avoid tax on the distribution by rolling it into another qualified retirement account. How you do that makes a large difference.
A direct rollover, sometimes called a trustee-to-trustee transfer, moves the money from your old account to the new one without a check being issued to you. Nothing is withheld and the full balance transfers intact.2Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
An indirect rollover is the version that involves a distribution check. The plan sends you the check, and for an employer plan the administrator still withholds 20%. You then have 60 days from the date you receive the check to deposit the full original amount into a new qualified account.5Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans To roll the full amount and stay tax-free, you have to make up the withheld 20% out of your own pocket, then recover it when you file your return.
Miss the 60-day window and the entire distribution becomes taxable income for the year, plus the 10% penalty if you are under 59½.6Internal Revenue Service. Retirement Plans FAQs Relating to Waivers of the 60-Day Rollover Requirement The IRS can waive the deadline in limited circumstances, such as a financial institution error, but you have to apply for the waiver or use the self-certification procedure.
Not every distribution qualifies for rollover. Hardship distributions, required minimum distributions, and substantially equal periodic payments cannot be rolled over.7Internal Revenue Service. Verifying Rollover Contributions to Plans
Required Minimum Distributions After Age 73
Once you reach age 73, federal law requires annual withdrawals, called required minimum distributions (RMDs), from most retirement accounts, including traditional IRAs, 401(k)s, and 403(b)s.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Your first RMD is due by April 1 of the year after you turn 73; each subsequent RMD is due by December 31.9Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) If you are still working, not a 5% or greater owner, and participating in your current employer’s plan, you can generally delay RMDs from that plan until you retire.
For people born in 1960 or later, the starting age rises to 75 beginning in 2033 under the SECURE 2.0 Act. If you were born between 1951 and 1959, your RMD age stays at 73.
Miss an RMD and the IRS imposes a 25% excise tax on the amount you should have withdrawn.10Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans If you correct the shortfall within two years by taking the missed distribution and filing the appropriate return, the penalty drops to 10%.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs RMDs themselves cannot be rolled over into another retirement account.7Internal Revenue Service. Verifying Rollover Contributions to Plans
Special Cases That Follow Different Rules
Inherited Retirement Accounts
When you inherit a retirement account, the rules depend on your relationship to the deceased and when they died. For deaths in 2020 or later, spouses and non-spouses are treated differently.11Internal Revenue Service. Retirement Topics – Beneficiary
A surviving spouse has the most flexibility. You can roll the inherited account into your own IRA and follow the standard RMD rules based on your own age, keep it as an inherited IRA and take distributions based on your life expectancy, or delay distributions until the deceased spouse would have reached RMD age.
Non-spouse beneficiaries fall into two groups. Eligible designated beneficiaries, which includes minor children of the account owner, disabled or chronically ill individuals, and people no more than 10 years younger than the owner, can stretch distributions over their own life expectancy. Everyone else is on the 10-year rule: the entire account has to be emptied by the end of the 10th year after the owner’s death. There is no required schedule within those 10 years, but the deadline is hard.
QDRO Distributions in Divorce
A Qualified Domestic Relations Order directs a plan administrator to pay a portion of one spouse’s retirement account to the other spouse or former spouse. The recipient spouse reports and pays the tax as though they were the plan participant.12Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order Those distributions can be rolled over into the recipient spouse’s own IRA or employer plan. If the QDRO instead directs payment to a child or other dependent, the plan participant, not the child, owes the tax. QDRO distributions are exempt from the 10% early withdrawal penalty regardless of the recipient’s age.4Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Roth Accounts
Roth distributions follow different rules because contributions were already taxed. A qualified distribution from a designated Roth account, such as a Roth 401(k), is entirely tax-free if it is made at least five years after your first Roth contribution to the plan and occurs after you reach 59½, become disabled, or die.13Internal Revenue Service. Retirement Topics – Designated Roth Account Fail either condition and the earnings portion is taxable and can trigger the 10% penalty; your original contributions still come out tax-free. Roth IRAs are not subject to RMDs during the original owner’s lifetime.
Legal Settlement and Estate Checks
Damages received for physical injuries or physical sickness are generally excluded from gross income, whether they come from a lawsuit or a settlement.14Office of the Law Revision Counsel. 26 USC 104 – Compensation for Injuries or Sickness Punitive damages are always taxable. Emotional distress compensation is taxable unless it relates to medical care for that distress. Any portion representing back pay, lost wages, or interest is fully taxable as ordinary income.
Estate distributions are generally not income to the beneficiary. The estate itself may owe estate tax, but assets you inherit are not reported as income on your personal return. The exception is income-generating accounts: when an estate distributes funds from the deceased person’s IRA or 401(k), those payments are taxable income to whoever receives them.
Form 1099-R and Year-End Reporting
Any distribution of $10 or more from a retirement plan, IRA, annuity, pension, or insurance contract is reported to you and the IRS on Form 1099-R.15Internal Revenue Service. Instructions for Forms 1099-R and 5498 The payer sends it by January 31 of the year after the distribution, showing the gross amount, the taxable portion, and the federal and state tax withheld. You need it to file your return. If any figure looks wrong, contact the plan administrator or financial institution for a correction before you file.