Distributions from retirement accounts are generally taxable except for the portion representing the taxpayer’s basis. Basis is the amount of after‑tax contributions remaining in the account. When a distribution includes basis, that portion is a tax‑free return of principal.
Taxpayers receive Form 1099‑R reporting gross distribution, taxable amount, and withholding.
Employer‑Sponsored Retirement Plans
Employer plans include:
- 401(k)
- 403(b)
- 457(b)
- SEP
- SIMPLE
- Profit‑sharing and other defined‑contribution plans
- Defined‑benefit plans
- Roth employer plans
Elective Deferrals
- Non‑Roth plans use pre‑tax compensation; contributions are excluded from wages and taxable when withdrawn.
- Roth plans use after‑tax compensation; contributions are included in wages and generally not taxable when withdrawn.
Employer Roth contributions are included in income when contributed and reported on Form 1099‑R.
Individual Retirement Accounts (IRAs)
Taxpayers may establish:
- Traditional IRA
- Roth IRA
Traditional IRA
- Contributions may be deductible or nondeductible.
- Deductible contributions have no basis.
- Nondeductible contributions create basis and are not taxable when withdrawn.
- Investment earnings are tax‑deferred.
Roth IRA
- Contributions are after‑tax and create basis.
- Qualified withdrawals are tax‑free.
- Earnings are generally tax‑free.
Required Minimum Distributions (RMDs)
- Required for traditional IRAs and non‑Roth employer plans once the taxpayer reaches the RMD age.
- Roth IRAs and Roth employer plans have no lifetime RMDs.
Basis in Retirement Plans and IRAs
Basis equals nondeductible contributions minus prior withdrawals of those contributions.
Most employer plans have no basis because contributions are pre‑tax.
Traditional IRA Basis Calculation
If an IRA contains both deductible and nondeductible contributions, each distribution is partly taxable and partly nontaxable.
Nontaxable portion:
Taxpayers must file Form 8606 to track nondeductible contributions.
Roth Accounts
Roth plan and Roth IRA distributions are usually not taxable because contributions are after‑tax.
Qualified distributions are tax‑free.
Rollovers
A taxpayer may maintain tax‑deferred treatment by rolling over a distribution into another qualified plan or IRA within 60 days. Amounts not rolled over are taxable.
Annuities
Qualified Annuities
Taxed the same as the underlying retirement plan.
Non‑Qualified Annuities
Funded with after‑tax dollars; basis equals total contributions.
Two phases:
- Accumulation Phase
- Withdrawals come from earnings first (taxable).
- Distribution Phase (Annuitization)
- Payments are split between basis and income using the exclusion ratio.
Exchanges
A §1035 exchange allows tax‑free replacement of one annuity with another.
Roth Conversions
A conversion moves funds from a non‑Roth plan or traditional IRA into a Roth IRA.
- The converted amount (minus basis) is taxable in the year of conversion.
- Amounts not converted remain taxable if kept.
Qualified Charitable Distributions (QCDs)
A QCD is a tax‑free transfer from an IRA to a qualified charity.
For 2025:
- Annual QCD exclusion limit: $108,000
- One‑time split‑interest QCD limit: $54,000
Rules:
- Taxpayer must be age 70½ or older.
- Distribution must be made directly by the IRA trustee.
- QCDs count toward RMDs.
- No charitable deduction is allowed for the excluded portion.
- Only traditional and Roth IRAs qualify (not employer plans).
Qualified HSA Funding Distribution
A one‑time, tax‑free transfer from an IRA to an HSA.
Rules:
- Must come from a traditional or Roth IRA (not ongoing SEP/SIMPLE).
- Must be made trustee‑to‑trustee.
- Reduces the taxpayer’s HSA contribution limit.
- Taxpayer must remain HSA‑eligible during the 12‑month testing period.
Net Unrealized Appreciation (NUA)
Participants in qualified plans may receive favorable tax treatment on employer securities.
Rules:
- Entire account must be distributed in a lump‑sum distribution.
- Basis in employer securities is taxed as ordinary income.
- NUA is taxed as long‑term capital gain when the securities are sold.
- Rolling employer securities into an IRA eliminates NUA benefits.
Distributions Due to Death
Beneficiaries must follow RMD rules.
Income in Respect of a Decedent (IRD)
Untaxed amounts in retirement accounts become IRD and are taxable to the beneficiary.
Inherited IRA — Death Before 2020 (Pre‑SECURE Act)
Non‑spouse beneficiaries may use:
- Lump‑sum
- Life expectancy method
- Five‑year rule (only if owner died before RMD age)
Spouses may treat the IRA as their own.
Inherited IRA — Death After 2019 (SECURE Act)
Most beneficiaries must withdraw the entire account by the end of the 10th year after death.
Eligible Designated Beneficiaries
These beneficiaries may use pre‑SECURE Act rules:
- Surviving spouse
- Minor child of the account owner
- Disabled or chronically ill individual
- Beneficiary not more than 10 years younger than the owner
Once a minor child reaches majority, the 10‑year rule applies.
Inherited Roth IRA
Same RMD rules as inherited traditional IRAs.
- Contributions are always tax‑free.
- Earnings are tax‑free if the Roth IRA is 5 years old.
Beneficiaries of Qualified Plans
Plan documents determine distribution options. Spouses often have more options than non‑spouses.
RMDs use the Single Life Table.
Prohibited Transactions
A prohibited transaction occurs when a plan engages with a disqualified person, including:
- Fiduciaries
- Family members
- Certain related parties
Examples:
- Transfer of plan assets for personal benefit
- Self‑dealing by fiduciaries
- Sale, exchange, or lease of property between plan and disqualified person
- Loans between plan and disqualified person
- Furnishing goods or services between plan and disqualified person
Qualified plans may make participant loans under specific rules.