In general, most distributions you take from your 401(k) account can be rolled over to another eligible retirement plan (e.g., profit sharing, 401(k) or 403(b) accounts) or IRA. These are called "eligible rollover distributions" – your ERDs.
However, some distributions from your account are one-way distributions that cannot be rolled over to another eligible retirement plan or IRA. These are called "non-eligible rollover distributions" – your NERDs. Essentially, any distribution that is not a NERD is an ERD.
A distribution is a NERD if it is:
A required minimum distribution (RMD)
A loan that was deemed distributed
An eligible automatic contribution arrangement (EACA) refund
Due to a non-discrimination testing failure (ADP/ACP testing, etc.)
Due to exceeding a plan limit (deferrals beyond the annual limit, etc.)
Withdrawals made as part of a series of substantially equal periodic payments (not allowed under Guideline plans)
Used to pay for accident, health or life insurance (not allowed under Guideline plans)
Dividends on employer securities (not allowed under Guideline plans)
There are two main reasons you need to know if your distribution is an ERD or a NERD: 1) to determine if it can be rolled over to another retirement account and 2) to understand what type of withholding will be applied to the distribution if it is not rolled over.
Withholding requirements on Guideline 401(k) distributions
When you take a distribution from a Guideline 401(k) plan as a cash distribution, the type of withholding the IRS requires will depend on if that amount could have been rolled over.
Note that any tax withholding will be applied to the taxable amount of your distribution. In general any amount of your distribution from a pre-tax source will be included in this calculation. Any actual contributions you have made to a Roth source will not be included, but the earnings will be if the distribution is not a qualified Roth distribution.
NERD withholding
If the amount you are taking as a distribution is a NERD, the IRS requires 10% federal income tax withholding on the taxable portion of the distribution unless you elect otherwise. This means you have the option to either waive federal withholding all together or elect anywhere from 1% to 100% withholding. Note that state income tax withholding may also apply. If so, you will not be able to request 100% federal withholding.
Even if you choose to waive federal (and state, if applicable) withholding, any pre-tax amounts included in the distribution will generally be included in your taxable income for the year it was distributed, and the 10% early distribution penalty will apply unless you qualify for a penalty exemption.
Withholding too little may result in under-payment penalties. The instructions for IRS form W-4R may help you choose the appropriate withholding rate. Please note that Guideline does not use Form W-4R; this form will be discarded if it is included with a distribution request.
ERD withholding
If the amount you are taking as a distribution is an ERD, and you have it paid to you instead of directly rolled over to another retirement plan or IRA, the IRS requires at least 20% federal income tax withholding be applied to the taxable portion of the distribution. You are not able to waive this withholding, although you can elect to have more than 20% withholding apply. In addition, certain states also require state income tax to be withheld.
In most cases, you will have 60 days to indirectly rollover ERDs you take as cash distributions. Any pre-tax amount not rolled over will be included in your taxable income for the year, and the 10% early distribution penalty will apply unless you qualify for a penalty exemption.
Please note that if you do not live in the US at the time, special tax withholding rules will apply. You can find more information about taking a distribution as a foreign person here.
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.