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In the context of the 401(k) industry, a "distribution" refers to the disbursement of funds from a 401(k) retirement plan. This can occur under various circumstances, such as when an individual reaches the age of 59.5, which is the minimum age set by the IRS for penalty-free withdrawals, or upon the participant's retirement, disability, or death.

A distribution could also occur when an individual decides to take an early withdrawal, although this generally incurs a penalty. The penalty is typically 10% of the amount withdrawn, in addition to the withdrawal being subject to regular income tax.

Distributions can take various forms, including:

  1. Lump-Sum Distributions: This is when the entire amount in the 401(k) account is withdrawn at once.
  2. Rollovers: This is when the funds in a 401(k) account are moved into another retirement account, like an IRA or a new employer's 401(k) plan.
  3. Annuity Payments: In some cases, the 401(k) plan may allow the account holder to receive distributions in the form of regular annuity payments, providing a steady stream of income over a period of time.
  4. Required Minimum Distributions (RMDs): These are mandatory distributions that must begin by April 1 of the year following the year in which the account holder reaches age 72 (or 70.5 if you reached 70.5 before Jan 1, 2020), or when the account holder retires, whichever is later.

The tax and penalty implications of a distribution depend on the individual's age, the reason for the distribution, and whether the distribution is rolled over into another retirement account.

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