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You need to understand what a distribution is. Here’s what to know.

What is a distribution?

Distribution is the withdrawal of money that the holder makes from a retirement account. Taxpayers must report the distribution amount to the IRS whether it is taxable or not. The term also refers to money paid out to shareholders in the form of a dividend.

Deeper definition

Taxpayers should know the difference between the three types of distributions: normal, early and required minimum. A normal distribution is money taken out of the account after you are at least 59 and one-half years old, while early distribution is money taken out before that time.

Six months after you turn 70, you must start withdrawing the required minimum distribution.

This doesn’t mean you must withdraw all your money at the same time. Some people choose a lump sum distribution which completely empties the account. Others opt for periodic distributions and receive a monthly or quarterly payment. Another option is to roll over the money in the account into an individual retirement account, or IRA.

Some retirement accounts are tax-deferred, meaning taxpayers do pay tax on the distributions they receive from the accounts. In addition to the tax, individuals who elect an early distribution also pay a penalty to the IRS.

Taxpayers report the distribution on Form 1099-R, for Distributions from Pensions, Annuities, Retirement, Profit-Sharing Plans, IRAs, or Insurance Contracts.

Distribution example

One of the decisions you must make when you retire is what to do with your retirement plans. If you spread your retirement funds across several types of accounts, you can choose to take distributions at different times.

For example, if you have your money in savings and in a company-sponsored pension plan, you may decide to use the savings to cover living expenses and wait until you must start taking the required minimum distribution from the pension and Social Security.

Do you know when to start taking distributions from your retirement plan? Use Bankrate’s retirement calculator to figure out how much you need to save so you can retire when you’re ready.

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