What is a deemed distribution in retirement plans?

A deemed distribution in retirement plans refers to amounts that are treated as ordinary income for tax purposes, even if the actual distribution has not yet occurred. This typically applies to situations involving loans taken against a plan balance. If a participant has an outstanding loan that is not repaid according to the plan's terms, it may be deemed a distribution, leading to potential taxes on that amount, as well as a possible early withdrawal penalty if the individual is under age 59½.

Understanding this concept is crucial as it affects tax liabilities and retirement planning strategies. Therefore, while participants may not receive the funds immediately, they are still responsible for the taxation of the deemed distribution, which can impact their overall tax situation for the year in which it occurs.