Retirement Distribution

Taking a distribution from a retirement account, while a possibility, is the least desirable way to use the money in a retirement account because the money withdrawn is heavily taxed. Federal income taxes are applied to the amount of the distribution payment.

In addition to the federal income taxes, consumers less than 59 1/2 years old are subject to an extra penalty when taking an early distribution payment from their 401(k) or IRA. The penalty amounts to a tax of 10% of the sum of the distribution payment.

Taking a distribution from a retirement account is the least desirable way to use retirement monies to help purchase a franchise. If franchisees take a distribution from their retirement account before the age of 59 ½, they will be subject to a 10% penalty and be forced to pay income taxes on the distributed amount.

Retirement account distribution amounts are added to an individual’s ordinary income in the year they receive the distributions. An individual whose adjusted income is less than $74,000 may be in a 25% tax bracket, but if that individual takes a distribution of $150,000, they would be paying tax of between 25-33% on their income plus the retirement funds. This is important to note because lump sum distributions are not just subject to tax, but to an equal or higher tax than individuals are paying on their other income.

The requirements for taking a retirement account distribution vary from plan to plan. Some plans allow distributions for any reason, while others only allow for hardship distributions. However, because most new franchisees leave their current employer to run the new business, they are often able to request a distribution 30 days after leaving the company.