Sometime in the future, the day will come when your work life ends and your retirement begins. If all goes as planned, you’ll have a nice nest egg to finance the retirement of your dreams. But how do you get your hands on the money? You take a distribution.

What is a distribution?
A retirement program distribution is a payment from a qualified retirement program, typically offered to you at the time of your retirement or when you are changing jobs. Bear in mind that the term “distribution” can also refer to other withdrawals made from your retirement account before retirement, such as loans or hardship withdrawals. 

Timing
Whether or not you are still working, when you reach age 59 ½ you may become eligible to take a distribution from your retirement program. You may also be eligible if you are age 55 or older and separated from service.  However, if you stop working before that time, a payout from your program will be considered a premature withdrawal and may be subject to a 10 percent premature distribution penalty* in addition to income tax.

Under the terms of your defined contribution program — your 401(k), 403 (b) or governmental 457(b) program, as opposed to a pension — federal tax law does not actually require you to begin taking distributions from your program until April 1 following the year you reach age 70 ½ (although your plan may require an earlier distribution). At that age, you must begin taking the required minimum distribution from your qualified programs and traditional individual retirement accounts (IRAs) or risk incurring a penalty. The penalty is 50 percent of the minimum distribution you should have withdrawn.

There is one exception to this rule. You don't have to take a distribution from an employer’s program if you’re still working there when you turn 70½. However, you must take the required minimum distributions from all other tax-deferred accounts (such as IRAs.)

Options at Retirement
Defined contribution programs usually offer several ways to take your money out of your account when you retire. To find out which options are available through your program and which specific restrictions or allowances may apply, review your program rules and highlights:

Keep your money in your current program
If you have a minimum amount, typically $5,000 or more in your retirement account,  you may opt to keep your money in your current program. You will avoid current taxes and a potential tax penalty, but your investment choices may be limited and you may not have complete control over your money. For further details on your retirement program’s  threshold, please review your program rules and highlights.

If your  program’s rules allow, you may be able to take periodic withdrawals from your account while still keeping the balance of your money in the program. There are generally two ways to take these kinds of withdrawals:

• Take the dollar amount you need each month until your money runs out.
• Set up a schedule of pre-set monthly withdrawals each month, establishing an end-date when your money will run out.

If you choose this option, you’ll need to carefully estimate how long you’ll need to be drawing from the account. If you’re like most people, your retirement account will be covering a good deal of your living expenses in retirement, so you may want to draw from the account for the rest of your life. Or, if you’d like to leave some of this money for your heirs, even longer!

There’s a very strong likelihood you’ll be retired for 20 to 25 years. You must be careful in setting a sustainable withdrawal schedule or run the risk of outliving your savings. If you want to finance 25 or more years of retirement, more than likely you will have to limit your annual withdrawals to between four percent and five percent of your nest egg. If you spend more than five percent of your total savings annually, you'll run the risk that your savings will run dry during your lifetime.

If you choose this option, the balance of the money in your account remains invested in whatever program investments you have previously chosen or choose during the periodic withdrawal period. Your total account balance — and therefore the amount of your payments and length of time over which you may be able to take payments — will depend on how well your investments perform.  At this stage, you should have most of the assets in your account allocated to relatively low-risk investments.

Bear in mind that all the money you keep in the program has the potential to continue to grow tax-deferred and you will pay taxes only on the money you withdraw from the account.

Purchase An Annuity, where allowed
If you are concerned about outliving your income, you may want to consider using some or all of your retirement program money to purchase an annuity. An annuity is essentially an insurance product that guarantees a series of regular monthly payments.

If you will rely heavily on your retirement account balance for income in retirement, purchasing an annuity with all or part of that balance could be worth considering.  Keep in mind that annuities are longer-term products and may not be appropriate in all circumstances; consider fees and expenses
 
The amount of your payments depends on: your age (for a lifetime annuity); the amount of assets in the annuity; the interest rate on these assets; the type of annuity you've selected; and any expenses that may apply to the annuity.

As with periodic or systematic withdrawals, the balance of your money continues to grow tax-deferred. You are only taxed on the payments as you receive them. However, with an annuity, you will not be able to decide how the balance of your money is invested. It is also important to remember that the decision to purchase an annuity is irreversible, so it’s a good idea to seek professional advice before selecting this option.

Take a Lump-Sum Distribution
If you need or want immediate access to all of your funds upon retirement, most programs will allow you to take a take a lump-sum distribution of the entire account balance, including all of your own contributions, the earnings on those contributions, and, if you are vested, any employer contributions that might have been made.

However, bear in mind that you will immediately owe income taxes on the total amount. You must pay ordinary income tax on the savings in your first year of retirement, plus a 10 percent premature distribution penalty if you're under age 55 (59 ½ for amounts rolled over from other plans). Any tax-deferred advantages allowed by your program will be lost when you choose this option. Depending upon the amount of this sum, taxes could be quite steep. On the plus side, once you have paid the taxes, you can spend or invest all of your money as you wish.

For further details on the distribution options available under your program, please review your program rules and highlights.

^*Government 457 Program withdrawals are not subject to the 10 percent premature distribution penalty.