Withdraw pre-tax money from your account
The pre-tax dollars you contributed to your MNDCP account lowered your federal taxable income for that year. Reducing your taxable income means lower taxes paid to the IRS at that time.
Of course, your tax liability wasn't eliminated. You merely postponed the taxation of your money. Withdrawals from your pre-tax balance are subject to federal and state income taxes. By law, MNDCP must withhold 20% federal income tax on withdrawals, except for periodic withdrawal schedules that last more than ten years.
Withdraw Roth after-tax money from your account
When you contributed Roth after-tax dollars, you paid taxes before you contributed them to your account. Withdrawals from your Roth after-tax balance are classified as "qualified" or "non-qualified" and are taxed differently.
A "qualified" withdrawal from your Roth after-tax balance is entirely tax-free if the withdrawal is made:
1. on or after age 59 ½ (or upon your death or disability),
2. after you have had money in your Roth account for at least five tax years.
If both requirements are not met, then a withdrawal from your Roth after-tax balance is considered "non-qualified." Non-qualified withdrawals are subject to 20% federal income tax withholding on the portion of the withdrawal that represents earnings only. The contribution portion of the withdrawal is always tax-free since taxes were already paid.
Tax Form 1099-R
Form 1099-R reports all taxable income you received from your MNDCP account and any state and federal taxes withheld. You will need this when filing your annual tax returns. We will mail your 1099-R by January 31 of the tax year following your distribution. Form 1099-R is available online through your secure Account Access by January 31 of the tax year following your distribution.
No IRS Early Withdrawal Tax Penalty
One advantage the MNDCP has over other types of plans (403(b), 401(k), IRA's) is that your withdrawals are not subject to the IRS 10% tax penalty usually assessed on withdrawals make before age 59 ½. If you roll over your MNDCP account assets to other types of plans, the early withdrawal tax penalty may apply.