Deferred distribution is a term that has to do with cash assets that are considered taxable but have yet to be distributed or disbursed. This type of distribution may occur in a number of settings, such as the settling of assets in a divorce settlement or even from borrowing against a portion of the balance of a retirement plan. Typically, certain events must take place in order for a deferred distribution to occur and trigger some sort of tax obligation.
One of the more common situations in which a deferred distribution may occur is as part of a divorce settlement. As the two parties arrive at how to allocate the assets involved, there is often the issue of how to handle assets such as retirement accounts. In some cases, the decision is made to treat the balance in the retirement account as an asset that can be immediately realized, assigning that balance based on its present value. When this occurs, no distribution is actually made from the retirement account at that time, but the present value of that account may be subject to taxes.
In like manner, deferred distribution may be a factor when an individual chooses to take out a loan against certain types of employer-sponsored retirement plans, especially plans that offer some sort of tax benefit or advantage up to the time of retirement. As long as the loan is paid in full during the time of the individual’s active employment, there is no tax obligation involved. Should the individual choose to leave the employer before that loan is repaid in full, any of the unpaid balance that is still considered borrowed against the retirement plan is very likely to be subject to taxation.
The defining characteristic of deferred distribution is that the asset in question is not made readily available to the owner, even though for tax purposes all or part of the value of that asset is treated as if it has been realized and is subject to taxes. There is often confusion as to whether a specific strategy or approach will create some sort of deferred distribution that results in a tax liability. For this reason, working with financial professionals to determine what type of taxes may be due if a certain action is taken will always be a good idea. Doing so can make it easier to decide if incurring the taxes is worth it given the circumstances surrounding the activity, or if some other approach could be used to better advantage.