A cash distribution or disbursement refers to a withdrawal of funds from a qualified retirement plan in the form of cash.
Because retirement funds are meant to provide you income in retirement, the IRS has specific rules in place to discourage you from withdrawing your money early. Therefore, distributions are only permitted in certain circumstances and penalties may apply if taken too early.
While a cash disbursement is allowed when you leave an employer, you’ll want to consider all the costs involved and how it will impact your retirement savings moving forward.
Taxes and penalties on cash distributions
If you decide to take a cash distribution after leaving your company any pre-tax amount that you do not subsequently rollover to an IRA or another eligible retirement plan will be included as taxable income. Additionally, 20% of the pre-tax distribution amount will be withheld as a pre-payment of federal tax (as well as state tax, if applicable).
Unless you qualify for an exemption, you will also owe a 10% early withdrawal penalty tax on the full amount when you file your taxes.
Alternatives to cash distributions
If you’d prefer to avoid the taxes and penalties associated with cash distributions, there may be several other options to consider:
When you complete a direct rollover to another qualified retirement account, you can generally avoid paying taxes and penalties altogether.
This information is for general education purposes only and not intended to be tax advice. We encourage you to consult a qualified tax professional before requesting a distribution.