IRA distributions are withdrawals of funds from your account. There are four main distribution options on the Transfer page, which correspond to specific distribution codes on the tax form 1099-R.
- Early Distribution. If you are under age 59 ½, you will see the option for an “early distribution,” which may mean that you will pay a 10% tax penalty along with any taxes owed on the withdrawal.
- Normal Distribution. If you are over 59 ½, you will see the option for a “Normal Distribution,” which is generally not penalized, but may still be taxed.
- Removal of excess contributions. This is a corrective distribution that is generally used if you have contributed too much to the account for the given tax year. While Betterment does not allow you to make annual contributions beyond $6,000 (or $7,000 if you are over age 50), you can still exceed the annual limit by contributing elsewhere, by making an indirect rollover deposit larger than the distribution made from your previous retirement account, or by exceeding the income limits for a Roth IRA. When removing excess contributions, you are generally required to remove both the excess contributions and the gains accrued on those contributions, which we can calculate for you. If the contribution was made at Betterment, our website will automatically calculate the gains for you in most cases, if you select this distribution type.
- Beneficiary distribution due to death. This distribution is generally used in the event of a death or when making distributions from an inherited IRA.
- Disability distribution. This distribution is described by an excerpt from IRS Publication 590B: “If you become disabled before you reach age 59 ½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.” There may be other conditions that are required in order to avoid the 10% penalty on your distribution.
For more on IRA distributions, please review IRS Publication 590B.
If you live in Michigan and want to withdraw from or convert your IRA…
As a Michigan resident, if you want to convert or withdraw from your IRA, the State of Michigan requires you to fill out Form MI W4P with your tax withholding instructions and return it to us.
Why do you have to do this? Well, since Betterment does not withhold state taxes for you (it reduces the amount of money that can grow tax-free in your Roth IRA), you must check Box 1 to state that you opt out of state tax withholding.
Please sign the form and return it to us. If you download the free Adobe Reader, you can fill it out and sign it electronically (and easily).
I had a special exception apply to my IRA distribution and my form seems to be coded differently. Why is this?
The Form 1099-R is the tax form which reports all distributions from an IRA. Brokerages such as Betterment are not required to make distinctions on special exceptions, which are the responsibility of the taxpayer to self-report.
As Betterment is not a tax advisor, we recommend consulting a tax professional or referring to IRS resources for reporting information and requirements.