7.29 Withdrawals From Employer’s Qualified Retirement Plan Before Annuity Starting Date

You generally may not make tax-free withdrawals from your employer’s qualified retirement plan, qualified employee annuity plan, or 403(b) plan before the annuity starting date, even if your withdrawals are less than your investment. On a withdrawal before the annuity starting date, you must pay tax on a portion of the withdrawal unless the exceptions below apply. The portion of the withdrawal allocable to your investment is recovered tax free; the portion allocable to employer contributions and income earned on the contract is taxed. To compute the tax-free recovery, multiply the withdrawal by this fraction:

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Your investment and vested benefit are determined as of the date of distribution.

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Favorable Recovery Rules
Both of the favorable cost recovery rules discussed under “Exceptions” in this section (7.29) are complicated and you should consult your plan administrator to determine if the exceptions apply and how to make the required calculations.
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Exceptions.

More favorable investment recovery rules are allowed in the following cases:

1. Employer plans in effect on May 5, 1986. If on May 5, 1986, your employer’s plan allowed distributions of employee contributions before separation from service, the above pro-rata recovery rule applies only to the extent that the withdrawal exceeds the total investment in the contract on December 31, 1986.
For example, assume that as of December 31, 1986, you had an account balance of $9,750, which included $4,000 of your own contributions. If the plan on May 5, 1986, allowed pre-retirement distributions of employee contributions, you may receive withdrawals up to your $4,000 investment without incurring tax.
2. Separate accounts for employee contributions. A defined contribution plan (such as a profit-sharing plan) is allowed to account for after-tax employee contributions (and earnings on the contributions) separately from employer contributions(and earnings on the employer contributions). If separate accounting is maintained, the tax-free part of the withdrawal can be figured without regard to the employer contributions (and allocable earnings), thereby increasing the tax-free amount.
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3.12.146.29