CPC CPC Plan Distributions & Taxation 1 — Questions and Answers
Question 1: Under IRC Section 72(t), which distribution from a qualified retirement plan avoids the 10% early withdrawal penalty?
- Any distribution after age 55
- Distributions made as part of a series of substantially equal periodic payments (SEPPs) (Correct answer)
- Lump-sum distributions for any reason after 5 years of plan participation
- Distributions to pay off a home mortgage
Correct answer: Distributions made as part of a series of substantially equal periodic payments (SEPPs)
Distributions taken as substantially equal periodic payments under IRC Section 72(t)(2)(A)(iv) are exempt from the 10% early withdrawal penalty.
Question 2: What is the required beginning date (RBD) for required minimum distributions (RMDs) for an employee who retired in 2024?
- April 1 following the year the employee turns 70½
- April 1 following the later of the year the employee turns 73 or the year they retire (Correct answer)
- December 31 of the year the employee turns 72
- January 1 of the year the employee turns 75
Correct answer: April 1 following the later of the year the employee turns 73 or the year they retire
Under SECURE 2.0, the RBD is April 1 following the later of the year the participant reaches age 73 or the year they retire (for non-5% owners).
Question 3: A participant receives a plan distribution and rolls it over to an IRA within 60 days. The plan withheld 20% for taxes. What happens to the withheld amount?
- It is permanently forfeited to the IRS
- It must be replaced from other funds to complete a full rollover; otherwise the withheld portion is taxable (Correct answer)
- It is automatically returned to the participant after filing a tax return
- It is credited to the participant's IRA directly by the plan trustee
Correct answer: It must be replaced from other funds to complete a full rollover; otherwise the withheld portion is taxable
To roll over the full distribution and avoid taxation, the participant must contribute funds equal to the 20% withheld from outside sources; the withheld amount can be reclaimed on the tax return but the rollover must be complete within 60 days.
Question 4: Which plan distribution option allows a participant to receive employer stock at its cost basis and defer tax on the net unrealized appreciation (NUA) until the stock is sold?
- Lump-sum distribution with NUA treatment under IRC Section 402(e)(4) (Correct answer)
- Installment distribution over 10 years
- Direct rollover to an IRA
- In-service withdrawal after age 59½
Correct answer: Lump-sum distribution with NUA treatment under IRC Section 402(e)(4)
IRC Section 402(e)(4) allows NUA on employer stock distributed in a lump sum to be taxed at long-term capital gains rates rather than ordinary income rates when the stock is later sold.
Question 5: A 401(k) participant takes a hardship withdrawal. Which statement is correct under post-2019 rules?
- The participant must take all available loans before a hardship withdrawal
- The 6-month suspension of elective deferrals following a hardship withdrawal was eliminated (Correct answer)
- Hardship withdrawals are always exempt from the 10% early withdrawal penalty
- The participant must repay the hardship amount within 3 years
Correct answer: The 6-month suspension of elective deferrals following a hardship withdrawal was eliminated
The Treasury's 2019 final hardship regulations eliminated the mandatory 6-month deferral suspension following a hardship distribution.
Question 6: What is the tax treatment of a qualified distribution from a Roth 401(k) account?
- Fully taxable as ordinary income
- Partially taxable based on the pro-rata rule
- Completely tax-free if made after age 59½ and the 5-year holding period is met (Correct answer)
- Subject to 10% penalty but not income tax
Correct answer: Completely tax-free if made after age 59½ and the 5-year holding period is met
A qualified Roth 401(k) distribution—made after age 59½ and after a 5-year participation period—is entirely excluded from gross income.
CPC CPC Plan Distributions & Taxation 1
Under IRC Section 72(t), which distribution from a qualified retirement plan avoids the 10% early withdrawal penalty?