A gross distribution is the amount of money you withdraw from an account, usually a retirement account such as an IRA or a 401(k). If the money in the account was deposited pre-tax, you'll need to pay taxes on the withdrawal, and the amount leftover after the payment of taxes is the net distribution. If the withdrawal is an early withdrawal, you'll also need to pay a 10-percent penalty on the gross amount.
To calculate gross vs. net distribution, simply subtract the amount of taxes paid on the amount distributed. The amount distributed before taxes is the gross, and the amount after taxes is the net. Any early withdrawal penalty is calculated on the gross amount, as are ordinary income taxes.
Gross vs. Net
Gross amounts are total amounts before deductions, while net amounts are what remains after deductions are taken. For example, your gross pay is your salary before taxes and other deductions like payments for insurance or retirement contributions. Once these deductions are taken out, your net pay is what you take home.
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This is also true for distributions. If you take a distribution from an investment account, the amount you withdraw is the gross amount, and if you pay taxes on the distribution, the amount you get to keep is the net amount.
Tax-Deferred Retirement Accounts
Retirement accounts such as traditional IRAs and 401(k)s are funded with pre-tax dollars. This means that the money comes out of your gross pay and goes into the account. The benefit there is that your taxable income is reduced; for instance, if your gross pay for the week is $1,000 and you contribute $200 per week to your 401(k), you'll only pay taxes on $800 for the week.
The taxes are only deferred, however. When you take the money back out of the 401(k), you'll have to pay taxes on it at the regular income tax rate for your tax bracket. When that happens, you'll see gross vs. net distribution come into play.
Distributions From Retirement Accounts
When you take distributions from a pre-tax IRA or 401(k), you will have to pay taxes on the withdrawals at the regular income tax rate. If the withdrawal is an early withdrawal (i.e., you haven't reached age 59 1/2 and you haven't met certain criteria), you'll have to pay an additional 10 percent penalty tax.
That penalty tax is calculated on the gross distribution, as are the ordinary income taxes. You don't get to deduct regular taxes and then calculate the penalty on the remaining net income; they all come off the top.
Gross Distribution vs. Net Distribution
As an example, suppose you have $100,000 in your 401(k) and you want to withdraw all of it because you don't want to work in 2020. When you withdraw $100,000, that amount is the gross distribution.
You'll need to pay taxes at the regular income tax rates, which for the 2020 tax year for an unmarried individual are:
- 10 percent of the first $9,875 ($987.50).
- 12 percent of the next $30,250 ($3,630).
- 22 percent of the next $45,400 ($9,988).
- 24 percent of the remaining $14,475 ($3,474).
Adding these amounts brings the total taxes to $18,079.50.
If you're not 59 1/2 yet, you'll also have to pay a 10 percent penalty tax on the gross distribution amount – 10 percent of $100,000 is $10,000. Added to your ordinary income taxes, the total you'll owe is $28,079.50, leaving you with a net distribution of $71,920.50.
The tax brackets are different for married individuals filing jointly and if you have other income aside from the retirement fund distribution. These variables can affect how much you pay in taxes.