401k
401k Information

401k Tax

Being a huge fan of investing in Roth IRA retirement accounts, I was recently speaking with a friend who had some misconceptions. She had made mention that she should begin to invest in a Roth IRA. While we were talking, I found out that she thought all retirement savings accounts meant that the money in the account would be tied up until you reach the age of at least 59 1/2. When she came to the realization that there are many ways to make IRA withdrawals before reaching that age, she quickly became very interested in how a Roth IRA could be of benefit to her.

Retirement Accounts: 401k, 403b, traditional IRA

Retirement accounts such as 401(k)s, 403(b)s and traditional IRA accounts are tax-deferred. This means that all money that is contributed to the retirement account is done so before any taxes are paid. This is the reason why your W2 can show a lower gross income amount. The money was placed into the tax-deferred account for retirement before taxes were calculated and deducted. Your federal and state taxes are based on your adjusted gross income, known as AIG. By making use of these tax-deferred retirement accounts, your AIG can be reduced.

Differences of a Roth IRA

Roth IRAs differ from these types of retirement accounts. A Roth IRA account is tax-exempt. This means that the contributions that you make to the account have already been taxed. This does not result in a decrease in your taxable income, but it does allow for you to withdraw from the account when reaching retirement age without having to pay any taxes on the withdrawn amount. In addition, you can withdraw your contributions before reaching the age of retirement without incurring any penalties. The five-year tax rule does apply to contribution withdrawals. If you leave all of your money in the Roth IRA account, you will earn more dividend, but the account is very flexible and offers you numerous options if you need to withdraw some of the funds before reaching age 59 1/2. Just be sure to adhere to the IRA withdrawal rules so you don’t incur any penalties.

It is important to be aware of the Roth IRA contribution limits. In 2009, the limit is ,000 for all single and married taxpayers. If you do not follow the withdrawal rules, there will be penalties. However, keep in mind that you can contribute money for the 2008 and 2009 year until April 15. This will allow you to be one year closer to the five year magic number without having to actually wait five calendar years.

Investing in Your Roth IRA

You can invest the funds in the Roth IRA in many ways, including mutual funds, certificates of deposit and money market accounts. Individuals are allowed to have more than one retirement savings account. While you can only have one Roth IRA, you can take part in a 401(k) plan offered by your company. Utilizing multiple retirement accounts will help you save even more for those retirement years ahead. It is always best to make the maximum allowed contributions to your Roth IRA account. These contributions will be greatly appreciated upon retirement when you will have a tax-free source of income.

Then my friend found out that she could not open a Roth IRA because she earned more than 6,000 a year. But for her and people like her there is definitely a solution. There is a solution better than a Roth IRA because your account can never go negative with the stock market and even grows tax free and has a guaranteed minimum rate of return as well as a death benefit. It is called Roth on Roids™ It is even better than an annuity because when you take money out it is income tax free. When my friend found this out she wondered why I even bothered telling her about the Roth IRA all-together.

Frequently Asked Questions

  1. QUESTION:
    401K & Tax?
    1. If the company’s contribution towards 401K is counted against yearly cap from IRS?
    2. The company in which I am working only allows us to contribute only 18% of total base salary…So, if I am making K, I can only contribute upto K per year and can never reach IRS yearly cap(for example ,500 in 2007)…Is this common for companies to have a cap? How can I save taxes on remaining amount(,500 – ,000 = ,500)? This does not seem right to me as low income people with great saving tendency can not save taxes due to %cap imposed by the company? does IRS play any role in this?

    • ANSWER:
      when you sign up for a Retirement plan, you make a contractual agreement with the Plan Administrator. The Administrator has a great deal of leeway in what he includes in the Plan document. Since this is a contractual agreement Tax Law does not change the initial agreement as long as the actual limitations are not exceeded.
      If your plan allows for a lesser percentage then that is your applicable limitation.

      There are IRA’s and other investments that you can look into.

  2. QUESTION:
    Can you cash out your 401K tax free to pay medical bills?
    I have to have a ,000 surgery not covered by insurance. I’m thinking of cashing out my 401K and someone told me that you can do it tax free for medical bills. Is this true?
    I’m only 25 so it’s not like I can’t build back up my 401K…

    • ANSWER:
      Your source may be close to the truth, if your other income isn’t too high.

      Is the surgery deductible? Cosmetic surgery is not deductible. If you cash out your 401k for nondeductible medical expenses, you will pay income tax and a 10% penalty on the withdrawal.

      I assume that you will have a ,000 withdrawal for deductible medical expenses. To the extent that your medical expenses exceed 7.5% of your adjusted gross income, that amount of the withdrawal will not be subject to the 10% penalty. So the penalty in your example is .75% of your AGI. On a ,000 AGI, that is just 5. Not much penalty at all.

      The entire withdrawal figures into your AGI. But if you itemize (and you will with a medical bill this size), you will deduct your medical expenses which exceed 7.5% of your adjusted gross income. This can reduce most but not all of the tax on the withdrawal.

  3. QUESTION:
    Is the penalty I paid for early disbursement of my 401K tax deductible?
    Is the penalty that I paid to the IRS for early disbursement of my 401k last year tax deductible this year?

    • ANSWER:
      I am sorry to say it is not. The penalty is an additional tax when you file the income tax return for the year of the distribution. This is the only impact on any income tax return for the 10% penalty.

      Laura H – H&R Block – Senior Tax Advisor 5
      **This advice was prepared based on our understanding of the tax law in effect at the time it was written as it applies to the facts that you provided.

  4. QUESTION:
    Is Turbo Tax able to figure early cash out 401K taxes?
    So I cashed out a 401K and want to use Turbo Tax. Can it figure the taxes and put everything on the right line?

    • ANSWER:
      Not a problem.

  5. QUESTION:
    Should I wait for a 401K tax statement for tax purposes?
    Will my 401K company (merrill lynch) send some kind of a statement for me to use for tax purposes?

    • ANSWER:
      If you took money out of the 401k because you are old enough to use your retirement savings, then you need to get a 1099-R so that you can report the money you withdrew and pay the proper income taxes on it.

      If you are talking about money you put into your 401k in 2008, there’s no tax forms coming. They might send you a statement telling you how much you put in and how much you gained or lost in value last year, but it has nothing to do with your taxes. The money you put in was already removed from the gross income that your company reported to the IRS on your W-2, so the reduction in taxable income happens automatically.

  6. QUESTION:
    Is there a difference between roth 401k and after tax 401k?
    I know that you pay into a roth 401k after tax but isn’t there just a non roth 401k where you get no penalty to barrow against it for certain things?

    • ANSWER:
      There are conventional (pre-tax) 401(k) plans and there are Roth (after-tax) 401(k) plans. Whether you can borrow from ANY 401(k) account depends on the specific plan provisions of that 401(k) plan. Some plans do not allow borrowing.

  7. QUESTION:
    What is the difference between pre-tax basic and pre-tax supplemental in my 401k plan?
    there are two choices when selecting the payroll deduction on my companies 401k – pre-tax basic and pre-tax supplemental. When selecting a percentage of my pay that I want to contribute, which one do I choose?

    • ANSWER:
      I’m guessing that you are actually talking about 2 different types of plans. The Basic would be the 401k and the Supplemental would be a SERP (Supplemental Executive Retirement Plan). The SERP is a non-qualified plan that may or may not be invested in the same manner as the 401(k). The accounts are NOT combined. The 401k is covered under ERISA law and is highly protected. The SERP does not have same protections. In fact, I think there has to be a risk of loss in the SERP for it to be valid.

      Essentially the 401k money is deferred and put into a trust. The compensation shows up on the w-2 when it’s actually earned for social security purposes but it’s not taxable for IRS purposes. When it comes time to pay it out you receive the cash and a 1099-R. That’s when it becomes taxable for IRS purposes. The money is real and the balance is tangible. The SERP, however, is typically a phantom plan. You defer your pay but the money does not go into an account for your benefit. The “comp” does not show up on your w-2 and is not taxable for IRS purposes. It’s as if you never earned it. The deferred comp money remains with the company. They may choose to invest it and let you direct it but it remains under their ownership. When it comes time for the payment, the money is paid through payroll and shows up on your w-2. That’s when it’s taxable for IRS and earned for social security.

      Generally how it works is people who are highly paid, max out their 401k contributions and then are stuck. Someone makes 225k can only put ,500 which equates to 6.89% of their pay. Hard to achieve an equivicable retirement income if you’re limited to that 15.5k. The SERP allows them to put more away…But, as I said the assets belong to the company so there is some risk here if the company goes under. Those in the SERP stand in line with all the other creditors.

      So, if you know you’re going to hit the 15.5k figure for the year then put a percentage into the Supplemental Plan. But if you aren’t going to hit that number anyway don’t bother.

  8. QUESTION:
    What penalties would I incur if I withdrawal from my 401k after tax monies?
    Here is my question. Say I want to withdrawal a certain amount of money from my 401k after tax money, would I have a penalty in doing so? I am not knowledgeable about this and looking for info.

    • ANSWER:
      You would pay taxes on it at your regular tax bracket rate, and if you are under 59 1/2 and don’t meet certain exceptions for using the money (first time home buyer for one, medical expenses for another, etc) there is an additional 10% penalty that you would have to pay on top of the tax.

  9. QUESTION:
    Is there 401K Penalty Tax Relief in the American Recovery and Reinvestment Act?
    I’ve searched online but can’t find the details for the Stimulus. Is the 10% penalty being waved for 2008 Federal Tax Filing if I withdrew from my 401K in 2008?

    • ANSWER:
      It is not being waived for 2008. Have not heard if it’s going to be waived for 2009.

  10. QUESTION:
    Can a 78 year old person who is still working at her job, take out money from her 401k tax free?
    My mother, who is married to my father who is not working, is still working and contributing to her 401k at her job in a grocery store in Florida. She is 78 years old and my father is 84. Can my mother take any distributions from that 401 k? Are these distributions taxable just like a normal 401k?

    • ANSWER:
      Since she is more than 59 1/2 years old she can take distributions from her 401K without penalty. Since she is still working she does not have to take a “required minimum distribution” which must be taken in the year your reach 70 1/2. She has to take the “required minimum distribution” in the year in which she retires.

      However, all distributions from a 401K plans are taxed at ordinary rates. The money was invested tax free, and the tax has to be paid when it is withdrawn.

  11. QUESTION:
    can i withdrawl a small amount from my 401K tax penalty free.?
    Got laid off after a few months from a new job. I have ,300 in the 401K . I really could use the money and its not alot of money. Can I withdrawl this penalty free or is the penalty on any amount of money.

    Thanks.

    • ANSWER:
      loss of job is one of the reasons that you can withdraw money from a 401k without the 10% penalty if you are under 59 1/2. You’ll still have to pay regular income tax on the withdrawal but not the 10% penalty.

  12. QUESTION:
    Is money deposited in a 401k plan tax exempt?
    My wife started making regular deposits in a 401k plan offered by her new employer in 2006.

    Question: Is the money she invested in the 401k Plan tax deductible in 2006? In other words, do these contributions count as taxable income….or are they tax exempt?

    If contributions to 401k plans are tax deductible, is there a limit to what we can claim on our federal income tax form each year if we file a joint return?

    • ANSWER:
      The money in my 401k is tax exempt until I get it out. I think they will take about 15% when you get it and if you aren’t a certain age they take another 10% at income tax time. I’m not great on these things so I hope someone can help you more.

  13. QUESTION:
    Can Contribute to a 401k and take the 401k tax deduction and the full IRA deduction?
    Let’s say I make K and I’m over 50. I deduct k for my 401k and I contribute k to my traditional IRA. Do i get to deduct the full k?

    • ANSWER:
      You are not charged taxes on the money put in the 401K, so you cannot deduct it.

      Assuming you put taxed dollars in your IRA, you may get a deduction there.

      Grandpa

  14. QUESTION:
    Why do Dems Want to Axe 401k Tax Breaks for Corps. But Keep Med. Insurance Tax Breaks?
    Dems get on McCain’s case for the idea of taxing insurance benefits that you get from your employer. Of course, McCain wants to PAY for those taxes by giving you 00 in cash.

    Obama wants to keep those tax breaks but now Dems want to eliminate the tax breaks that corporations get for contributing to your 401k.

    Are Dems trying to ensure this country becomes like 3rd world countries?

    • ANSWER:
      They have to find a way to shore up social security and pay for the give aways….after they end the pretax contributions to 401ks and IRAs this will increase taxes to anyone under 250k and people will see smaller paychecks.

      http://www.fatwallet.com/forums/finance/868561

  15. QUESTION:
    Is there a way to cash in my 401k without tax or penalty and invest it in starting a business?
    I heard there was a way to start a small business using your 401k and not get taxed or penalty.

    • ANSWER:
      If you are still working at the employer which sponsors the 401K, then you can’t take money out of it except to buy a home. That is a loan, not a distribution unless you leave the company.

      Taxes are like sex. You shouldn’t learn about either from people on the street. You should learn from experts.

      You can’t use the money in your 401K to invest in a business you own. All investments must be in disinterested third parties. That means you can buy stock in GE or Apple, etc. but you can’t invest in the stock of a company you control.

      I hope this helps.
      Gary

  16. QUESTION:
    Do I have to fill out a particular tax form for paying out 401K during the tax year?
    This is my first year contributing to 401K with pre tax dollars. Is there a particular form I need?
    No its not included in my W2 but thanks anyway.

    • ANSWER:
      no because its pre taxed unless you take money out then its another form your 401 actually LOWERS your tax base thus lowering how much you pay back at the end of the year or giving you a refund.

  17. QUESTION:
    401K tax break and my paycheck?
    I have heard that investing some of your paycheck into a 401K will actually make you’re take-home pay more because of the tax break. Lets say i make 2000 a paycheck minus taxes… so about 1400 a paycheck (assuming taxes are 30%)…if i invest 6% of my 2000 before taxes into a 401K, will that percentage of a tax break actually put more money in my paycheck after taxes and the 401K are taken out rather than just getting taxed on the whole 30%?

    • ANSWER:
      The tax break referred to means that the money you put into the 401k will not be taxed. If you make ,000 less 0 tax you have ,400. If you invested 6% of the 00 in a 401k (0) you taxable pay would be 00-0=80. Using your 30% tax rate you would pay tax of only 4. Your take home pay would be 80-4=16. Your savings in the 401k (0) plus your take home pay (16) totals 36 which is more than you would have had without saving the 0 in your 401k.

  18. QUESTION:
    Can an early distribution from your 401k change your tax bracket?
    I took an early distribution from my 401k to buy a house. Does the addition of the withdrawal money to my personal income change my tax bracket?

    • ANSWER:
      Keep in mind that you will pay regular taxes and a 10% penalty.
      Hopefully your employer kept at least 20% to help you pay your taxes at tax time.
      And yes, it can knock you right into a higher tax bracket since it is considered income…

  19. QUESTION:
    What is the penalty and tax to cash a 0 401k check?
    I received a check from my previous employer for closed 401k account. Federal tax taken out was 4. What will it cost me at tax time if I just cashed the check now and paid the taxes when the time came?

    • ANSWER:
      I’m confused. You already received the check and 4 was withheld? Well, then you have already given the IRS over 20%. You will be taxed according to your tax bracket at the end of the year. Then you will pay a 10% penalty.

      The only way to avoid this is to deposit the funds into an IRA within 60 days of the date of the check.

      So, really it doesn’t matter if you cash it or not. The IRS now knows you took a distribution. If you decide to put it in an IRA, the Trustee will give you a form to offset the tax form you receive at tax time from the 401k.

  20. QUESTION:
    Does anyone care that B Hussein Obama and Pelosi want to tax our 401K?
    I am shocked, but they want to tax 401K as well. Not to mention the high tax on gas….raising the price higher.

    • ANSWER:
      That’s true! the dividend tax rate will go from zero to 39.6% YIKES! That is just the tip of the iceberg, I’m afraid, that will sink this country.

  21. QUESTION:
    401k, Can the government change the tax rate on 401k plans in the future?
    I know that the government has changed the distribution age several times in the past on 401k plans but I was told that the government could change the tax rate anytime and for any amount.

    • ANSWER:
      Tax rate? I must be missing something because 401K plans are non taxable till you withdraw the funds at 59 1/2.

  22. QUESTION:
    Please tell me Obama hasn’t mentioned taking away the 401K Tax Deferment?
    Please tell me he doesn’t support that idea, I know some Democrats too and that would be one of the dumbest moves ever. Why would someone even consider nationalizing 401K’s? If I want to take the risk in the stock market shouldn’t I be allowed to?

    • ANSWER:
      It’s not Obama that’s pushing for it, it’s George Miller (D-CA) and Jim McDermott (D-WA). Found a bunch of details on it in the article I’m citing.

  23. QUESTION:
    What is the tax rate for 401K distribution from an estate?
    Hi –
    Receiving a distribution from a relative’s estate which was largely in a 401K…..will this distribution be taxed at a fixed rate or do we specify the rate…..or will it be taxed at our taxable income rate from our most recent tax return? We are in CA….will there be both Federal and State tax implications? MANY THANKS! Can’t really ask the trustee as they charge (greatly) for their time!

    • ANSWER:
      Are you listed as beneficiaries? This would mean the 401k was not part of the estate. It would pass to those named as beneficiaries and the same rules would apply to you as to the original owner — 10% penalty for early withdrawl and both stae and federal income taxes.

      However, if the estate is the beneficiary. The estate would be paying the taxes and the heirs would just get the cash.

  24. QUESTION:
    What are the tax effects of 401k loan repayment ?
    If i take a loan from my 401K, would the repayment be deducted from my pre or post-tax income?

    • ANSWER:
      I believe the answer is no since you are not making payment to your 401K you are replenishing money that you borrowed from your 401K that was already not taxed. The government doesn’t allow for many double dippings.
      Call and accountant but I am sure they would just laugh.

  25. QUESTION:
    Obamas 401k plan is the best plan ever, no 401k tax for up to 10,000, isn’t it awesome?
    no 401k tax for the first 10,000 isn’t this the best plan ever, i am a republican and voting obama because of this… i am unemployed and need my 401k isn’t this plan awesome?

    • ANSWER:
      Damn democrats… you’ll believe anything another liberal dem will say.

      Always got your hand out for something free – have you ever thought about working and taking care of yourself rather than expecting the government to do it?

  26. QUESTION:
    Anything tricky about taking a post-tax distribution from 401K?
    I am nowhere near retirement age, but I noticed the assets in my 401K are mostly pre-tax, but there is about K that is post tax. Since I already paid tax on this, I should be able to take a distribution in this amount and not trigger any penalties or extra taxes, right? I would think any interest or capital gains on my post tax contributions would remain in the account and not be available until I take taxable distributions.

    • ANSWER:
      If it’s in your 401k, then any withdrawals that are not hardship withdrawals (Per IRS, hardship withdrawals are only permitted if there is an immediate and heavy financial need and other resources are not reasonably available to meet the need) will be penalized by the federal govt by 10%. So you would receive k from your 401k but when you file your taxes, the federal government would want their 10% penalty. Doesn’t matter if you’ve already paid taxes and doesn’t matter if you tell your 401k to keep any interest/capital gains in your account.

      You may also want to make sure the 10k has already been taxed in your state as well, cause if it hasn’t and you withdrawal, you’ll be liable for state taxes on the full 10k.

  27. QUESTION:
    What is the difference between pre-tax 401k and post-tax 401k?
    I AM ONLY 19 SO I DONT KNOW MUCH ABOUT IT. I HAVE IT THROUGH MY JOB AND FIND MYSELF SWITCHING FROM POST TAX TO PRE TAX VERY OFTEN BECAUSE PEOPLE KEEP TELLING ME DIFFERENT INFORMATION.

    • ANSWER:
      Pre-tax is great! Here’s why:

      Let’s say your gross pay is 0 (just for simplicity). Let’s say your taxes come out to 15% and you choose to put 5% of your gross into the 401K.

      Pre-tax, is taken out of your gross pay for the 401K first — before taxes. That leaves taxable income of . 15% of is .25, leaving net of .75.

      Post-tax, same numbers, you are taxed on the full gross, leaving . Then take out the for the 401K, and you’re left with . You just lost 75 cents. Doesn’t sound like much, but most people’s gross pay is a lot more than 0. The disparity between your gross and net income will be more dramatic when you earn more. Go pre-tax. You can’t lose. And the 401K in general is a great idea, especially when it comes to that conventional wisdom of “paying yourself first.” Wish I’d had one when I was 19!

  28. QUESTION:
    With 5 sm. children which, Would be to my advantage to invest in roth or before tax 401K? 20yrs til I retire?
    They are a huge tax write off now. So, does it make sense to put as much in Roth 401k or do I need to put my money in before tax 401k?

    • ANSWER:
      Difficult question. Requires tax/after-tax analysis of 20 years before retirement plus after retirement years. It would be worthwhile to see a CPA and pay a few hundred dollars for a complete tax analysis of your situation.

      My overly simplistic analysis, which excludes many other factors of computing taxable income, reveals a slight monetary benefit from going with the Roth 401(k). Thus, assuming 20 years to retirement and 20 years after, you might consider 1/2 Roth 401(k) and 1/2 Traditional 401(k) to hedge against potential tax law changes over the next 40 years.

      My overly simplistic analysis follows:

      Before retirement you earn ,000/year, get a ,000 deduction for the 5 kids and contribute ,000/year to your 401(k) that earns you 10% year. After retirement, you earn ,000/year, have no kid deduction and do not contribute to a 401(k). Both before and after retirement your tax bracket is 25%. You live 20 years after retirement.

      Contributing to Roth 401(k):
      * Before Retirement Income = ,000
      * Before Retirement Taxable = ,000 (income less kids)
      * Before Retirement Tax = ,000 (effective rate is 18.75%)
      * 401(k) balance after 20 years = 2,750 (10% return)
      * After Retirement Income = ,000
      * After retirement income from 401(k) = ,638
      * After Retirement Taxable = ,362 (income – 401k)
      * After Retirement Tax = ,840 (effective rate is 13%).

      Contribute to Traditional 401(k):
      * Before Retirement Income = ,000
      *Before Retirement Taxable = ,000 (income -kids -401k)
      * Before Retirement Tax = ,500 (effective rate is 15.60%)
      * 401(k) balance after 20 years = 2,750
      * Other investment balance after 20 years = 8,260 (7.5% after tax return from investing annual 00 tax savings in regular taxable account)
      * After Retirement Income = ,000
      * After retirement income from 401(k) = ,638
      * After retirement income from other investments = ,413
      * After Retirement Taxable = ,600 (income – other investments … these were already taxed)
      * After Retirement Tax = ,647 (effective rate is 22.74%).

      Conclusion:
      Contributing to Roth 401(k) or Traditional 401(k) results in same 401(k) balance of 2,750 after 20 years. Because the Roth 401(k) is not taxed, you will save 6,000 in taxes over the 20 years of your retirement. However, if you contribute to the Traditional 401(k), you get a ,500/year tax savings today that you can invest to build a balance of 8,260 by retirement. Thus:

      Roth 401(k) tax savings during retirement = 6,000
      Benefit of investing today tax savings from = $(108,260)
      traditional 401(k)
      Net 40 year benefit of choosing Roth 401(k) = ,740

  29. QUESTION:
    how do I report my 401K on the 1040 tax form?
    I’m trying to file a 2005 tax return and I can’t find where to report my 401K. Any help would be greatly appreciated.

    • ANSWER:
      If you just put money in to a 401k through work and did not withdraw it, it does not go on the 1040 at all. The amounts on the W2 already take in to account the money you put in.

      If your income was low enough, you may qualify for a retirement savings contribution credit (Form 8802 ?????) for just putting money in to a 401k.

  30. QUESTION:
    My work offers a 401k. Should I choose to do pre-tax or after tax?
    I was told I should do a Roth IRA, but to my understanding a roth ira is just one that is an after tax account. So instead of opening an additional roth should i just change my 401k to after-tax?
    The 401k has the option to pick pre-tax or after-tax. so essentially it could be both.

    • ANSWER:
      It depends on how much money you are making now and how much money you are anticipating to receive when you retire.

      For example, if you make more money now, then you would expect to when you retire, it is better to do a pre-tax option now. That way, when you receive your retirement income, you will not be in as high of a tax bracket then you are now, and will be taxed less.
      If you make less money now then you expect to receive during retirement, it is better to do the taxed option. This way, you are being taxed at this lower bracket now, rather than when you retire. It will NOT be taxed as income if you withdraw from this 401(k). It’s more like a savings account, than a traditional 401(k).

  31. QUESTION:
    Do I have to wait for a tax form similar to the W2 from cashing out my 401K before filing taxes?
    I cashed out my 401K in December.I received 00.I have already gotten my W2′s in the mail from my employer and I was wondering if there is antoher form I need to wait for from the 401 K before filing my taxes?

    • ANSWER:
      Most definitely. There will be tax and perhaps penalty on the withdrawl of that money – depending on your age and other factors.

      W2s, 1099s, etc have to be in your hands by Feb 1. Wait until you get all your forms before filing your taxes.

  32. QUESTION:
    What is the major difference in taking money out for my 401k pretax or post-tax?
    All I can think of is that my tax liability will be less on my biweekly paycheck…but then I pay taxes when I withdraw my 401k anyway.

    • ANSWER:
      If the money is put into the 401(k) pretax then when you withdraw the money it is taxed at then current tax rates. If you put the money in after-tax then when you withdraw the money there is no tax liability. At some point in time you will have to pay income tax on the money. either now or later.

      The gamble is whether income tax rates in the future will be higher or lower than what they are today. Most knowledgeable people would say that within the next 10 years they will be higher but beyond that who knows.

  33. QUESTION:
    Are federal and state tax rates the same for 401K distribution as ordinary income?
    I read somewhere that we “might also pay state tax” on 401K distribution and wonder where the “might” happens vs. “might not”. Also if 401K distribution is the main source of income, then will I be taxed the same as that is my income? In that case, what is the current tax rate? Thanks in advance!
    Thanks for all the answers. Just to clarify, this question is for the qualified periods (after 59 1/2 years of age), so there will be no 10% penalty, etc.
    One main point of my question is about “state tax.” If I am paying state tax on my income now, is there a scenario where I don’t have to pay state tax on 401K distribution? (e.g. what happens if I move to another state?)
    MikeL, thanks for the answer. However, consider this scenario: in my life, I have been working in California (2-9% state tax), Nevada (no state tax), and others. In the end, my 401K balance is an accumulation of contribution from my working in all these states, with different state tax. In my retirement years, if I move to Nevada and withdraw my 401K, and if Nevada has no state tax on income, do I have to pay for any state tax? If yes, how? Thanks!

    • ANSWER:
      You will pay state taxes on the 401-K only to the state of residence for when the withdrawal occured. If all of your career was is California (2-9% tax rates), but you retire and move to a state with no state income tax (Nevada, Florida, Texas, etc.) there would be no state tax.

      California tried a few years ago to track down and tax former residents, but the federal courts made them back down.

      Hope this helps.

  34. QUESTION:
    If a person earnt 40,000 for the year and withdrew 20,000 from a 401k what is the amount of tax one would pay?
    Ok if you earnt 40,000 for the year and withdrew 20,000 from your 401k how is the tax figured . I understand first of all you must pay 2000.00 on the 20,000 then do you pay taxes on 60,000 ? I have read sometimes there is a additonal 25 percent on the 20,000 along with the 10percent . Anyone know how the taxes are figured?

    • ANSWER:
      When you take the 20k they would withhold 20% of it or 4,000. You would receive 16,000 in cash.

      then…

      At tax time the following year you’d get a 1099-R showing this to have happened.

      and…

      You would put the 20k on the front page of the 1040 and it gets added to your 40,000 of employment income. You’d take your normal deductions/exemptions to determine your tax.

      then…

      Once you get your tax you’d add to that (on a seperate line on the 1040) an additioanl ,000.00. You would then have your total tax.

      and finally…

      You’d take the withholding from your job and add that to the previously mentioned ,000. If it’s higher than your tax you still get a refund. If it’s lower…you’ll owe more money.

  35. QUESTION:
    Is the Roth 401k contribution limit pretax or after tax?
    I understand the contribution limit for any type of 401k is ,500 per year. I am wondering if this is on a pretax or after tax basis for the Roth 401k.

    If the limit is after tax, then technically you can contribute significantly more to your account. You would be able to contribute ,385 of your paycheck to your Roth 401k, have it be taxed at 35% to bring it down to ,500. Is this the case? Or can you only contribute 16,500 of your paycheck?

    • ANSWER:
      Wow MJM’s math is completely wrong especially for all those great sources he mentions. Let’s try this again.
      Roth –
      ,385 – taxes (35% from the question) = ,500 (approximately) then 4x growth = ,000 in your pocket
      Traditional
      ,385 goes in then 4x growth = 1,540 – taxes (35%) = ,000 (approx.)
      They come out the exact same. The difference is where will taxes go during this time frame. With a traditional 401k you take on the risk of taxes going up.
      As a side note matching in a Roth 401k goes into a traditional 401k account so the matching is a pre-tax contribution.

      I do want to commend you on the question though because you do catch on to the difference here. The Roth essentially allows you put a lot more money in a tax qualified account than the traditional does. Oh and to answer your question the Roth contribution is after tax. Please let me know if you have any other questions.

  36. QUESTION:
    My company doesn’t offer a 401K. What other alternatives are there that provide tax deferral?
    My company, which had a 401K, was just purchased by another company that does not have a 401K. If an IRA is already maxed out, are there any other alternatives to investing the money that used to go into the 401K that would provide tax deferral?

    • ANSWER:
      A ROTH IRA contact TD Ameritrade. They will get you started.

  37. QUESTION:
    Can I tranfer 401K funds within the same mutual fund company without incurring a tax impact?
    For example, I’d like to switch from DWS Stock Index Fund to DWS Large Cap Value Fund. Both funds are managed by Scudder in a 401K. Are there any tax implications?
    How about if I transfer company stock to a Scudder fund within the same 401K? In other words, transfer my company stock to DWS Stable Value Fund, all within the 401K.

    • ANSWER:
      It certainly is not a bad idea to reduce your exposure to your company stock and instead diversify your 401K holdings. As long as the funds remain within the 401K there is no tax implication.

  38. QUESTION:
    what will be my (income) tax rate for 401K withdrawal after retirement?
    Let’s say I’m 65 years old now, not yet retiring. My current income is about 0K, so my income tax rate is the highest (state & federal.)

    In a few years, I will retire and plan to withdraw about K per year from my tax-deferred 401K account.

    What will be my tax rate then?

    • ANSWER:
      It is ordinary income and is taxed at the same rate as money earned at a job. It would be the same rate as having a job paying 50k a year. At 65 you get an extra exemption which lowers your tax a little.

      There would not be any taxes withheld other than federal and state tax (no ss or med, etc)

      If you are single a very rough estimate would be 00 federal tax plus state tax.

  39. QUESTION:
    Why do the give you a penalty tax for withdrawing your 401K early?
    They took 33% of my 401K. Is this the standard tax? Also I noticed there were no state tax withheld which means I’ll owe at the end of the year.
    Trust me I wouldn’t have done it if I didn’t need to.

    • ANSWER:
      You get penalized because that is the way the law is written.

  40. QUESTION:
    I cashed in an old 401K. How much state tax will I need to pay?
    I cashed in and old 401k that was $ 10,000. They already took abot $ 2000 for federal, but did not take State tax out. I know that I need to pay it, but I don’t know how much…

    • ANSWER:
      Depends on what state you live in.

      http://www.taxadmin.org/FTA/rate/ind_inc.html

  41. QUESTION:
    Employer tax deduction on a 401k contribution?
    What percent tax deduction does an employer get for contributing money to an employees 401k? Thanks.
    Is there a percent range that most companies fall into? Or a graph or table that I can look at to try and see what deduction the employer would get?

    • ANSWER:
      If your tax bracket is 15% and you put ,000 in as a match for your employee, you would save 0 in taxes.

      Helen, EA in PA

  42. QUESTION:
    What are the tax implications for Canadians for 401k and ROTH IRA at retirement?
    How do taxes work when Canadians who may have worked in the US withdraw money from their 401k or ROTH IRAs at retirement? Someone told me that a 401k can be withdrawn (and taxed in the US), but when the money is taken to Canada it will not be additionally taxed. However, the ROTH IRA would be taxed as new income in Canada. Is this true? If so, this defeats the whole purpose of the tax free growth provided by the ROTH IRA.

    I am currently working in the US but am a Canadian Citizen and hence dont really know where i will be come retirement (40 years away) so I am not sure as to where I should invest. I am trying to collect details so I can make an informed decision.

    Thanks
    Mathew, I know how the taxes work if you remain in the US. I need to find how they work if you plan to take the money to Canada. Of course I dont know how things will work in 40 years, but how do they work now?

    • ANSWER:
      For US taxes the 401 k disbursements will be taxed at your tax rate when you retire and the Roth disbursements will be tax free. Who knows what the Canadian tax rules will be in 40 years.

  43. QUESTION:
    Can i open 401K and contribute to 2006 tax year?
    Can i open 401K with my employer now before April 17, 2007 and contribute to 2006 tax year and get tax deductions?

    • ANSWER:
      No. You can only open a 401(k) when you first become eligible to participate or during your employer’s open enrollment period. A 401(k) opened now and any deferrals deposited to it would be for the 2007 tax year.

      And you don’t make deposits to one, your employer deducts your investment from your pay and deposits it to the account on your behalf.

      You CAN open an IRA and make a deposit by April 17, 2007 for tax year 2006. Whether or not you would get a deduction for the deposit would depend upon your income since you appear to be covered by a qualified pension plan through your work, even if you are not currently participating in it.

  44. QUESTION:
    What is the best way to pay the tax penalty for early withdraw of 401K?
    If you withdraw your 401K early are there any tax breaks or cheaper taxes to pay on the pentalty?

    • ANSWER:
      nope. The penalty is there to prevent you from taking it out early. If you did not yet, please dont do it because it is a really bad financial decision. You get taxed for it at your highest income bracket, and an additional 10%. There are no breaks, and you have to pay it as you will get slapped by the IRS if you dont because it is reported to them. A 401k is a really good way to save money to retire. I am in my 20s and I am still doing it with no intention to take it out. You will regret it when your retire.

  45. QUESTION:
    Tax question on 401k distribution?
    I moved some post tax 401k money to a brokerage account (my own money I put in, no employer money). My 1099R shows the gross distribution, but as taxable amount shows zero. Is this a taxable event? The brokerage house is Fidelity, and they’re usually pretty good about calculating this. I was told I can do this tax free, but want to be sure. The distribution code is 1 – Early distribution, no known cause.

    • ANSWER:
      If the 1099-R shows zero in taxable amount then it’s a non-taxable event. I find it odd though that there was no earnings on this amount. Earnings on a post-tax 401k account are pre-tax and thus should be taxed upon distribution. Did you get 2 1099-R’s? 1 for post-tax showing what you said above and then 1 for pre-tax that you rolled over?

  46. QUESTION:
    If I maxed out my employer 401K plan, can I contibute to an IRA and still get a tax encentive?
    I have maxed out my 401k for the 2009 tax year, and wanted to know, if I contribute to an IRA, will I still be able to get a tax incentive for the IRA contribution?

    • ANSWER:
      Yes! Yes! and Yes! You are a smart person. Just make sure that you meet the income thresholds. You will be able to retire at a young age. Good Luck!

  47. QUESTION:
    My husband recentlt died and I am the beneficiary of his 401k. What are the tax consequences?
    The 401k plan is taking out 20% for federal taxes and 4.5% for VA stat taxes. If I roll this over into my IRA, what happens to these taxes I will have paid?

    • ANSWER:
      You don’t have to withdraw the amount. You can roll it over into an IRA account without paying taxes or penalties. If you are above 59 1/2 years old, then you may be required to take out some money every year, but you are not required to fully cash it out.

  48. QUESTION:
    Is Contributing To Your 401K Tax Deductable?
    With the money you contribute to your 401K within a year, can you get a tax credit when you file your taxes?

    • ANSWER:
      yes and no…

      yes, contributing to your 401k gives you a tax break. this is because 401k contributions are not taxed until you withdraw the money after you retire. so you won’t have to pay tax on the income that goes in to your 401k for years.

      no, you dont get a tax credit for 401k contributions. your 401k contributions will lower your tax burden because it doesnt appear as income.

  49. QUESTION:
    Tax Pros please – Can I do both? 401k contribution and a tax deductable IRA contribution for 2006 tax year?
    I really need a definitive answer. In 2006, I contributed to my company sponsored 401k plan. Can I also make a tax deductible contribution to my IRA in the same year? On my w-2, I have a checked box under “Retirement Plan.” Does it make a difference in tax deductibility if I contribute to a traditional or Roth IRA? Thanks for your help!

    • ANSWER:
      1) Maybe. If you are single and you make under k, you should be able to do a deductible traditional IRA. If you make over k and are single, you can not. If you make between k and k, the 00 IRA limit is reduced.

      2) Only traditional IRAs are deductible. Roths are not.

  50. QUESTION:
    What are tax penalties when borrowing from 401K to pay for home, then laid off ?
    I borrowed from my 401K to purchase home. The terms of loan were payoff over 5 years. I was just laid off. I have to now pay back the amount in full. BUT I am also being told I will incur tax penalties. I thought there were no tax penalties when the loan is used for the purchase of a home ?

    • ANSWER:
      Well, however told you that there were no tax penalties for borrowing from your 401k was wrong. It must be repaid with in a certain time frame. You’re getting laid off has nothing to do with your decision to use 401k money for a purchase of a home, it just makes things more complicated. Call IRS or see a tax preparer.