What is a Qualified Reserve Distribution?
by John Cooney on Sep 26, 2018
If you are a reservist* and have been mobilized onto Active Duty, you may be eligible to take money out of your qualified retirement plan without incurring the normal IRS penalties associated with an early withdrawal.
What Are Qualified Reserve Distributions?
A Qualified Reserve Distribution (QRD) is a distribution from a traditional IRA or an elective deferral under a 401K or a 403b retirement plan. Normal distributions from these plans before the tax-payer is 59 ½ incur a 10% penalty on the amount withdrawn. QRDs however, are an exception to this rule, and the money can be withdrawn, with no IRS penalty. You will though, still be responsible for any income taxes owed as a result of the distribution.
What Are the Requirements to be a QRD?
To qualify as a QRD, the following requirements must be met:
- Order to active duty must have been after September 11th, 2001
- You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve component
- The distribution must be from an IRA or from an elective deferral under a 401k or a 403b plan
- The distribution must be made no earlier than the date of the order or call to active duty and no later than the close of the active duty period
Why Would You Take a QRD?
First of all, just because you can take one, does not mean that you should. The QRD was put into law as a recognition that being mobilized can put a financial strain on a reservist and their family. To ease some of this financial burden, the law allows the reservist to access their retirement accounts and not have to pay the normal penalty that comes with taking an early withdrawal. If you find that you are in a financial situation that may require you to take on additional debt as you transition from your civilian job to active duty, then a QRD may be a good alternative for you to secure your finances, without incurring additional debt. However, while the IRS does not impose a penalty, that does not mean there is not a price to pay. Every day that the money is out of the account, is a day that you lose the earnings that could have compounded in the account. The good thing is that the IRS also allows you to pay back the funds into your account, giving you the option of really making a QRD act like a short-term loan.
Qualified Reservist Repayments
If you took a QRD, you do have the ability to put that money back into your account. This option is available to you, even if making the deposit would cause you to exceed the general limit available to you for contributions. For example, say if in 2017, you took a QRD from your IRA of $2,000. In 2018, you decide you have the funds to repay the contribution, but you have already contributed the IRS limit of $5,500 to your IRA. No problem, with a Qualified Reservist Repayment, you can still pay back the $2,000 as it does not count towards your contribution limit for that year. The options to pay back however are not unlimited, for the payment to be counted as a Qualified Reservist Repayment, it must meet the following rules:
- You must have received a QRD
- Your repayment can not exceed the amount of the QRD
- The repayment must occur no later than 2 years from the date your active duty period ended
- You can not deduct the repayment for income tax purposes
When you make the payback, you will want to also include IRS Form 8606 when you file your taxes for the year you made the payback. Form 8606 lets the IRS know you made a non-deductible contribution, and will save you from paying taxes again when withdrawing the repayment in retirement.
Looking for more info on QRDs?
While it is an option that should be carefully considered before being executed, it is important for you to know what financial options you have when being called to active duty. If you find yourself being mobilized and think a QRD is right for you, I encourage you to contact a financial planner who can help examine your options and provide you with the information that you need in order to make a qualified and informed decision.
*IRS defines a reservist as: Army National Guard, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard, Air Force Reserve, Coast Guard Reserve, and Reserve Corps of the Public Health Service