7.5 Plan Access, Rollovers, Withholding, and Employer Stock

Start with the distribution event

A plan may restrict when money can leave even if a tax exception would eliminate the additional early-distribution tax. Determine whether a distribution is permitted, whether it is eligible for rollover, which portion is taxable, and whether an additional tax applies. These are four separate questions.

An in-service withdrawal occurs while employed and depends on the plan and statutory rules. A hardship distribution addresses an immediate and heavy financial need under applicable conditions. A hardship distribution is not a loan, is not repaid through an ordinary rollover, and does not automatically escape the 10% additional tax. Some separate exceptions may apply to the particular facts.

Loans, defaults, and offsets

A compliant participant loan is generally not a taxable distribution when issued. The plan must permit loans, and statutory balance and repayment limits apply. Repayments generally require substantially level amortization at least quarterly and a term no longer than five years, except for a qualifying principal-residence purchase loan.

A deemed distribution can arise from failure to meet loan conditions. It generally is not eligible for rollover. A plan loan offset instead reduces the account balance to satisfy the debt. A qualified plan loan offset resulting from the specified separation or plan-termination conditions can have a rollover deadline extending to the tax-return due date, including extensions, for the offset year. Do not apply that extended deadline to every defaulted loan.

Direct and indirect rollovers

A direct rollover transfers an eligible distribution from a plan to an eligible receiving retirement arrangement. The mandatory 20% withholding on a taxable eligible rollover distribution paid to the participant does not apply to the directly rolled amount. A pre-tax rollover to a traditional IRA generally preserves deferral; a direct rollover to Roth can create taxable conversion income.

An indirect rollover pays the participant first. An eligible rollover generally must be completed within 60 days unless a statutory exception or valid waiver applies. Withholding is a prepayment of tax, not a fixed tax rate or penalty. To roll over the entire gross amount, the participant may need replacement funds for the withheld portion.

Worked example

An eligible pre-tax plan distribution of $100,000 is paid to the participant. Mandatory 20% withholding sends $20,000 to the IRS and delivers $80,000 cash. To complete a full rollover within the applicable deadline, the participant must deposit $100,000, using $20,000 from other funds. If only $80,000 is rolled over, the remaining $20,000 is generally taxable and can face the additional early-distribution tax if no exception applies.

The withheld $20,000 is credited on the tax return. It is not automatically forfeited. A direct rollover avoids this cash-replacement problem, but the recommendation still must compare the plan with the proposed IRA.

The one-rollover-per-year distinction

The one-per-12-month restriction generally concerns IRA-to-IRA 60-day rollovers, aggregated across the person's IRAs. It does not restrict direct trustee-to-trustee IRA transfers in the same way and does not apply to plan-to-IRA rollovers or Roth conversions under that limitation. A calendar-year reset is not the test.

A required minimum distribution is not eligible for rollover or conversion. An inherited IRA received by a nonspouse generally must move by an eligible direct trustee transfer to a properly titled inherited arrangement; it is not the beneficiary's ordinary contributory IRA. Verify title and distribution rules before moving inherited assets.

Employer securities and net unrealized appreciation

Net unrealized appreciation (NUA) can preserve favorable treatment for qualifying employer securities distributed in kind from a qualified plan. In a qualifying lump-sum distribution, the plan's cost basis in the securities generally is ordinary income in the distribution year. The NUA generally is deferred until sale and then treated as long-term capital gain, subject to the detailed rules.

For example, assume employer shares have a plan basis of $40,000 and value of $150,000 at a qualifying distribution. The NUA is $110,000. Distributing those shares to a taxable account can recognize $40,000 of ordinary income while preserving NUA treatment for the $110,000. Any additional appreciation after distribution follows its own holding-period rules. The taxable basis portion can face an early-distribution tax if no exception applies.

The lump-sum rules generally require distribution within one tax year of the entire balance in the relevant category of the employer's qualified plans after a qualifying event, such as separation, death, or attaining 59½; disability rules have specific applicability. Obtain plan and tax advice on prior distributions, plan categories, and the triggering event. Merely owning company stock does not establish NUA eligibility.

Rolling the shares into an IRA generally gives up the special NUA opportunity for those shares. NUA is not automatically better: compare immediate ordinary tax, concentration risk, capital-gain rates, time to sale, and alternatives. A low-basis stock distribution can be attractive yet inappropriate if it leaves the retiree exposed to one employer.

Coordinate before authorizing a transfer

Obtain the plan's tax notice, distribution options, cost basis, loan status, RMD amount, and beneficiary or spousal-consent requirements. Document why keeping assets, partial rollover, full rollover, or mixed treatment serves the client. A transfer that is operationally easy can destroy a valuable distribution exception or tax election.

Checked October 19, 2026: IRS Publication 575 and Publication 590-A rollover rules.

Decision checkpoints