401k
401k Information

401k Taxes

I was sitting in the sauna a few weeks back, chatting with a fella who had just liquidated his 401k because he was sick and tired of the performance and so he decided to take action and buy an income property to improve his chances on higher returns.He was looking forward to the benefits of property ownership like positive cash flow, having someone one else payoff the mortgage and California property appreciation, especially since he bought during a time when housing prices are significantly less than usual.He was quite proud of his decision but he was lamenting however his heavy tax bill coming due at the end of this year because he had cashed in his 401k.I was flabbergasted.I asked if he had heard of a self-directed IRA or if his realtor and told him about it and he said no.I went on to tell him the details of self-directing but since it was after the fact, there was no way for him to avoid the tax man.It occurs to me that many folks don’t know about this amazing vehicle for investing so I wanted to bring you up to speed, especially you realtors who aren’t in the know.

A self-directed individual retirement account is an IRA that requires the account owner to make investment decisions, directions, on behalf of their own retirement plan.This is executed through a custodian that holds the assets on behalf of the owner.Usually the custodian or trustee handles all transactions and other records pertaining to the assets, including filing required IRS reports, issuing client statements, etc.The custodian does not make investment decisions or recommendations about the assets, only the owner can do that.The custodian merely executes the directions the owner gives, although they are very helpful if you have a transaction in mind and don’t know how to do it.

The interesting part about this account is what you can buy in it: stocks, bonds, mutual funds (traditional looking investments).But more interestingly are these: real estate, mortgages, franchises, partnerships, private equity and tax liens to name the most common.There are just a few exclusions like life insurance and collectibles.

Let’s take an example of what you can do with your 401K.Let’s say you have 0,000 in your company’s mutual fund.You transfer the whole account into a self-directed IRA.Then you decide you want to buy a property for 0,000 and get a mortgage on it.Assuming you are allowed by your company to cash out some stock, you take out ,000 from your 401K by selling some shares, apply for the mortgage, start collecting rent, depositing the rent checks back into your self-directed IRA, leaving the balance of 0,000 in the mutual fund.Any expenses you have on that house must be paid for with your self-directed funds.Similarly any profits you realize from that property must go back into your IRA until you turn 59 , like a traditional IRA, lest you want to pay the 10% penalty and taxes that constitute a 401K early withdrawal.Let’s continue the example: after holding the property for 10 years you decide you want to sell it.You sell and get 0,000 for the property, depositingmore than 0,000 into your IRA.A nice return on your money, no?

What have you accomplished?You have a nicely diversified portfolio: company mutual funds and an investment property.This is a simplified example for illustrative purposes but there are many creative ways to use this.Another example where you can be a passive real estate investor would be to direct your IRA to purchase equity shares in a real estate company that does the investing for you.

Obviously there are custodian fees associated with the account, like any other type of brokerage account but hopefully your returns will exceed your fees, just like when you are in the stock market.There are several companies that offer custodial services and a simple Google search of self-directed IRAs will provide that.Be sure to do cost comparisons based on the number of transactions you intend to do.This is a basic introduction to self-directed IRAs and is not intended to be comprehensive so please consult a professional before making that move but it is a very exciting vehicle for wealth building so I encourage you to take a closer look.

Please add any comments to this discussion on self-directing your IRA.Peace.

Frequently Asked Questions

  1. QUESTION:
    401K & taxes?
    In 2006 i switched employers. I realize that in 2006 there is a K contribution limit to 401K plans. But i have exceeded this limit by 1. Since i never reached the K limit with each employer in that year, the automatic correction by each plan administrator never took place.

    So now i am preparing my taxes & i have found that execess contribution. Wondering what is my next step in terms of taxes.

    • ANSWER:
      You can withdraw the excess contribution and the associated gain by the filing deadline for your 2006 return without penalty. Contact your plan administrator to take care of this.

  2. 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.

  3. QUESTION:
    How do I use 401k money to start a business without any taxes or penalties.?
    I’m starting a new business. I have already invested K of my own post tax money but I need to buy a new vehicle that will be predominantly used for business. I would like to take K out of 401k without taxes or penalties. How can I do this. I would rather just get the money rather than do a loan as I’m trying to keep my monthly outlay low while I get the business off the ground.

    • ANSWER:
      I doubt that you can take your 401K money to start a business without taxes or the 10% penalty. Only the following reasons escapes the penalty:

      1. If you have extraordinary out-of-pocket medical expenses one year and your medical expenses exceed 7.5% of your adjusted gross income, you can withdraw funds to pay those expenses without paying a penalty.
      2. An IRA distribution for first-time home purchases also escapes the penalty.
      3. Distributions for qualified higher educational expenses also are exempt.
      4. IRA distributions made to unemployed individuals (unemployed for more than 12 weeks) for health insurance premiums aren’t subject to the 10% penalty tax.
      5. If you receive a distribution due to “separation from service” (you’re no longer at the job) in or after the year you reach age 55, you escape the penalty.
      6. Distributions due to your death or due to total and permanent disability also avoid the 10% penalty tax

      Even then, the above techniques may spare you the 10% penalty tax, but there is still no escaping the regular income tax that’s owed when you start withdrawing funds from your retirement plans. Unless your money is parked in a Roth IRA — which is after-tax contributions — you’re going to pay a tax.

      CNN Money has a comprehensive article on the topic http://money.cnn.com/2000/07/31/pensions/q_retire_withdrawals/ . They suggest that if you need a quick fix loan, you can “withdraw money from your IRA for 60 days without penalty if you replace the money before the end of 2 months and you don’t do it more than once a year.”

      I feel your pain …

  4. QUESTION:
    Born in 1950′s what is retirement age to cash in 401k without taxes or penalties?
    I was born in 1950 and have heard different ages for retirement, in order to cash in my 401k without taxes or penalties.What is my retirement age?

    • ANSWER:
      As others have stated correctly, you cannot avoid taxes on the money you take out from a traditional 401k. You can avoid the penalty at age 59 1/2 or as early as age 55 if you terminate employment at that time and you take the distribution at that time.

      If your 401k is a Roth 401k, which has only been available for a few years, then you have funded the Roth 401k with post-tax dollars. In that case, if you wait until age 59 1/2 (or age 55 if terminating employment and withdrawing at that time) your withdrawals would be tax-free.

  5. QUESTION:
    401k: what taxes do I pay when I retire?
    I have a traditional 401k. I know that the contributions and growth are deferred until I retire. When I do start to pull out money, are all the capital gains taxes due? Do I have to keep track of all the buys/sells I’ve made?

    • ANSWER:
      You do not have to keep track of your buys & sells. It does not matter if you do short term or long term gain. After retirement when take out money every year, it will be treated as regular income (like your salary) and taxed according to your tax brakcet in that year.

  6. QUESTION:
    401k taxes taken out before or after deductions?
    I’m 55, single and am not sure about having taxes taken out before or after my deductions. Right now I’m having taxes taken out before my deductions, believing this is the best way to go so I won’t have to pay taxes later. Would i be better off not having the taxes taken out until I retire?

    • ANSWER:
      Depends on the income bracket you are in at the moment.

      The higher the income bracket your are in the bigger the tax bite. By deferring monies until retirement, chances are you income will not be as high ergo taxes will be lower.

      At present you are paying FICA, Medicare, State & Federal taxes aand your 401k. In addition you are probably paying health insurance, dental and a flurry of other things that come out of your paycheck that, except for health, you would not be paying when you start utilizing the monies.

      I would be willing to bet your taxes on the 401k monies would be less when you retire than now.

  7. QUESTION:
    is there income to report on a 401k for taxes?
    I have my 401k and I want to do my own taxes this year. What will I have to report? There is a very small dividend issued this year. Will that need to be reported? Or will I need to report end result amount only?thanks..filing jointly.

    • ANSWER:
      Unless you withdrew money from your 401K, nothing to report on your income taxes.

  8. QUESTION:
    Can I deduct from my 401K to pay taxes due to the IRS without a penalty?
    I owe the IRS 7K for taxes this year. The money I owe is for taking an early withdrawal from our 401K to fix the bathroom. I’m not sure it counts as a hardship, but the bathroom was mold infested and needed to be gutted everything replaced. Can i take more money out of my 401K to pay the taxes due and not have to incurr another penalty?

    • ANSWER:
      Taking money from your 401k means double tax. You get taxed everytime you borrow. Remember when you pay it back and take it during retirement, you get taxed again!

  9. QUESTION:
    How does it work when you recieve a 1099 for cashng in a 401k when filing taxes?
    I cashed in a 401k last year and recieved a 1099 in the mail that looks like a w2. Federal taxes were taken out of it already so am I going to have to pay or will the income and federal withheld count the same as a w2?

    • ANSWER:
      You add it to your other income and calculate your taxes just like you would if you had another W2.

  10. 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.

  11. QUESTION:
    How much can my widowed mom take out of my deceased father’s 401K without paying taxes.?
    Her only income is social security. What is the maximum she can withdrawl without paying taxes and how much should she roll over. The 401K is a bit less than ,000. Should she just take the lump sum?

    • ANSWER:
      It depends on how much other income she has.

  12. QUESTION:
    Can i withdraw my 401K money without any penalties and taxes since i am leaving the country for good?
    My Work Visa expires in April 2007. So i may have to go back to my country. Is there any way i can save on this 401 K money. I can keep it as it is in 2007 and take it out in 2008. In 2008, i won’t have any income in the United States and so whether i will save on taxes for 401K?

    • ANSWER:
      If you are going to leave the country and never come back then withdraw it in 2007 because it won’t be reported until the end of the year. If you have a base in it then you can deduct your base off the total and the penalty will be less. If you plan on working until April 2007 then you would want to file a return in 2008 just to get any refund back even though you are out of the country, but if you aren’t worried about a refund then take your 401K and run. Of course if you ever came back to the US and tried to work they might get you for income tax evasion.

  13. QUESTION:
    What taxes will I pay on a rollover IRA and 401K if I cash out?
    My husband had 00 in a 401k (most was contributed this year) he lost his job and it was rolled over into an IRA. We did not do the rollover within 60 days. He is disabled and will not be going back to work.

    Here are my questions – 1. Will we have to pay taxes on the 401K since it was not rolled over within 60 days. 2. If we cash out the IRA now, would we have to pay taxes on both the 401k and the IRA?

    • ANSWER:
      Yes and if he is under the age of 59 1/2 the 10% early distribution penalty will also able plus the federal income tax at your marginal tax rate.
      Sound like the money that is the 401K is the same funds that was deposited into the IRA this year and the amounts are being withdrawn in the same year so NO that amount would not be taxable again because the IRA was not an IRA account for the year 2010.
      Hope that you find the above enclosed information useful and good luck.

  14. QUESTION:
    Which federal form do I use to pay the additional taxes on my 401K?
    I quit my job last year and as a result my 401k was canceled and I received a payout of the balance. I understand I have to pay taxes on this amount as income, and I also have to pay an additional 10% tax for the early withdrawal. I don’t see any place on the tax form for this additional tax however. What form do I need to file for the extra 10%?

    • ANSWER:
      1040 is the only form that shows the 10% penalty line.

  15. QUESTION:
    When you cash out your 401k, do you get taxed during the cash out and then when you file taxes for that year?
    A friend of mine cashed out her small 401k from a job we shared. She had about 0 worth taken from her amount for penalties and taxes. Will she be penalized again when she files her taxes next year?

    • ANSWER:
      whatever they withheld should include the income tax that they were required to withhold, if they penalized her for taking distribution early according to their plan, that is something within the contract
      however, when you file your tax returns for the year, you will be penalized 10% on your 1040 and another % for the state(in Calif. it is 2 1/2%)
      the company does not collect these penalties

  16. QUESTION:
    How can I withdraw 401K with Penalty or taxes to purchase investment property?
    I would like to withdraw funds to purchase and investment property from my 401k. the 401K is with an old employer. What is the best way to get the funds without being penalized or paying taxes? Someone told me to transfer to an IRA account. Is that true?
    OK, I am 35 and married.

    • ANSWER:
      No.

      There are no exceptions to paying the tax.

      There are a few exceptions to paying the 10% penalty but this is not one of them.

      The same goes for IRAs.

  17. QUESTION:
    How does taxes work for 401K?
    My father is interested in changing jobs and with his present job he has a good build up of his 401K. If he closes the 401K account, how will the taxes be handled? Will they take taxes out before he receives the money, after he receives it, in between?? How does this work? Also, if he was to put some of the money into paying a house morage off, will he recieve a tax break? Are there any tax breaks in this? Thanks!

    • ANSWER:
      Mortgage debt is good debt unless he has a high interest rate. I would keep the 401K if it is a good plan (the employer has to pay the administraive costs on the 401K) or roll into an IRA.

  18. QUESTION:
    do I have to pay taxes on my 401k no mater what?
    I want to withdraw money out of my 401k, but I know there needs to be taxes paid on the amount I take out. I have heard there are exceptions to that depending on the cause of the withdrawal. Does anyone know the specifics?

    • ANSWER:
      You always declare the withdrawal as ordinary income and pay taxes on that amount, that doesn’t change whether you’re 20 or 80. The difference is if you haven’t reached age 59-1/2 you pay an additional 10% of the entire withdrawal as an early withdrawal penalty except for a handful of reasons. They are discussed in the link. No reason for me to type them out.

      If you borrow the money you don’t pay taxes but you must pay it back.

  19. QUESTION:
    I’m on SSDI only income and borrowed from 401K, they withheld taxes and penalties will i have to pay snc disbl
    My only income is SS and I borrowed from 401K due to financial hardship, will I still have to pay taxes since my SS is only income and I’m on SS disability

    • ANSWER:
      If you’re on disability you’re probably no longer employed by the sponsoring employer of the 401(k). As such you cannot “borrow” from the plan. Money borrowed is not taxed but distributions are; that’s why tax was withheld. The distributions are fully taxable however you may be able to avoid the 10% penalty tax as you are disabled. Whether any of your SSD is taxable will depend upon your total income.

  20. QUESTION:
    How Much will I owe in taxes on an inherited 401K plan?
    I inherited my daddy’s 401k plan. He dies last month he was young so its not alot. It is 24,000. How much taxes will I have to pay on that?

    • ANSWER:
      OK, now for the correct answer.

      401(k) plans are deferred income plans, meaning the tax is deferred until it is taken out. For federal purposes, you will have to include in your income whatever you take from the plan that year. If you take the whole ,000, you will have to add ,000 to your taxable income on your 1040 (line 16b). The amount of tax this will trigger depends completely on many, many other things such as your other taxable income, whether you are married, the number of dependents you have, etc. It could be as high as 35% or as low as 0%. Neither are likely, but I wanted to give you the extreems.

      If you are not working, single, dependent on someone else (live with your mother), and have no income or deductions, then your federal income tax on the ,000 will be around ,750.

      You may owe state income tax too. If you do, chances are it will be substantially less than the ,750. Some states don’t tax this type of income.

      As far as inheritance tax, the IRS has none. Instead, they have estate tax which your father’s estate will have to pay. It is extremely unlikely that his estate is large enough to trigger an estate tax.

      Some states have inheritance taxes. Most don’t tax IRA or 401(k) inheritance. Even if they did, it probably wouldn’t be much.

      Good luck!

  21. QUESTION:
    do I have to pay taxes on a 401k I cash in?
    I have a 401k,from my former employer. I lost over 6000,in this nightmare. I hear there is no taxes on a withdrawn 401k at this time. Is this true?

    • ANSWER:
      Why not just roll it over into a Rollover IRA? Let your former employer or 401 (k) administrator do it for you. You only lost value, not actual money. When those shares rise, your value will come back. So you never lost any money unless your manager sold shares at a loss.

      But about that withdrawal. Federal income tax plus a 10% penalty will be owed. I think its better to roll it over.

  22. QUESTION:
    Will I need to claim my 401k rollover on taxes this year?
    I found out that I had money left in my old employers 401k plan, I rolled it into an IRA in Feb of 2009. Should I recieve something for tax season this year? If so will it be from my old employer and what type of a form will it be.

    • ANSWER:
      No, the reason for doing a rollover is so that you DON’T have to pay taxes on the money. The exception is a Roth IRA – if you rolled your 401k into a Roth (or if you rolled into a traditional IRA and then converted to a Roth), you will have to pay taxes on that money.

      If you’re not sure what type of IRA you have (traditional or Roth), contact the fund company (or bank) that holds your IRA and ask them.

      I hope that helps.

  23. QUESTION:
    Are state taxes also deferred in a 401k plan? If so, can I avoid paying state taxes by moving tax free state?
    For instance, when I retire can I avoid paying state taxes on my 401k distributions by moving to Florida, which does not have state taxes.

    • ANSWER:
      Yes. You contributions to 401(k) are pre-tax, so you are not deferring state taxes, you are paying out of pre-tax income.

      If you move to Florida (or in my case Washington), you pay taxes in the state you reside in when you start withdrawing from your 401(k) at your retirement age.

      Note that if you withdraw earlier you will pay a 10% penalty

  24. QUESTION:
    Can taxes on supplemental income be avoided by placing it all in 401k?
    An employee was being paid commission and had elected to make his 401k deduction 100% of his net income. Does supplemental income have to be taxed federal and state? Can he use his 401k elective to avoid paying taxes on suuplemental income?

    • ANSWER:
      No. The most that can go into the 401K is 92.35%. The remaining 7.65% is needed for social security taxes and medicare taxes.

  25. QUESTION:
    How do I use my 401k for startup funds, little taxes, and reinvesting?-unemployed?
    I have a 401k from the job I just left. I want to start a small business. How can I use a portion of this to start up my business and not pay a fortune in taxes, as well as reinvesting the rest in a rollover IRA?

    • ANSWER:
      You might want to plan carefully. The amount taken out and not rolled over within 60 days is taxable. Some folks take some out in December and some out in January to spread the tax burden over two years. If you are not yet age 59 1/2 you may be subject to an additional 10% penalty.

      Your 60 (calendar) day count for the rollover started the day after you received the check from them.

  26. QUESTION:
    What line does taxes withheld for a 401K distribution go?
    Hi,
    I read online to put the taxes on line 64 but that is Earned Income Credit. That seems weird to me.

    I am referring to the 20% withheld from a 401K Distribution rollover for Form 1040

    • ANSWER:
      The total amount of the distribution goes on lines 15a and 15b. The 20% federal income tax withheld from your distribution will be reported with all other taxes withheld from forms W-2 and will appear on line 62.

  27. QUESTION:
    First year for my 401k and I wonder do I have to file the amount I have paid into it with my taxes?
    This is the first year I have ever put money into a retirement plan and I was not sure if I am to file the monetary information on my taxes. I have not borrowed against the 401k or transferred any money out of it. Am I supposed to file my 401k retiremnet info on my tax form? I use 1040ez form… Thank you!
    I apologize for the misspellings…; )

    • ANSWER:
      The amount you put into your 401K should not be included in your gross earnings on your w-2. The amount you contributed will be reported on your w-2 and depending on your income you may get a credit on the amount you invested. In short the contributions to your 401(k) are not taxable.

  28. QUESTION:
    When calculating how much income is needed at retirement,should money be added for taxes on 401K withdrawal?
    I have my current monthly budget, I take out the P&I from my mortgage, take out student loans and add 00 for health benefits then compund the final amount at 3.15% a year until I retire. Should I then take that monthly budget and add say 24% for taxes since 401K withdrawals are considered income?
    I have my current monthly budget, I take out the P&I from my mortgage, take out student loans and add 00 for health benefits then compund the final amount at 3.15% a year until I retire. Should I then take that monthly budget and add say 24% for taxes since 401K withdrawals are considered income? Ex. I need 6K a month based on budget, so becase of taxes I’ll actually need 1.24 x 6K or 40 a mo? (Company will not change current traditional 401K plan)

    • ANSWER:
      It depends on what you’re trying to do. What you have right now is your after tax budget. If you’re trying to decide how much you will need in savings, then yes, you should gross it up for taxes.

  29. QUESTION:
    How much taxes are paid on a 401k loan?
    I took a loan against my 401K for 00 (not a withdrawal), payable over the next 5 years through automatic deductions from my paycheck. If I leave my company, I have 90 days to repay otherwise it gets considered a distribution. What does that mean? What would my estimated fees be next time I file taxes?

    • ANSWER:
      Your regular tax rate plus a 10% penalty.
      Keep in mind that this could possibly throw you in a higher tax bracket.
      Keep some money handy.
      /

  30. QUESTION:
    We cashed out on 401k early, how does that affect my taxes?
    I need to file my taxes. We cashed out on 401k in 2010. The amount we got on our check was 2 from 401k. Was the penalty fee for early withdraw already taken out from that total amount? I dont remember what the grand total amount was before we recv check. Also, do we have to pay 10% more on our taxes? Should’t this 2 amount count as income as well?

    • ANSWER:
      You will get a 1099 that shows the distribution and the taxes withheld. Use that for computing your taxes.

  31. QUESTION:
    I was wondering if the taxes on 401k distributions was an approximate 28%, plus the 10% for not being 59 1/2?
    It’s kind of hard to understand the taxes part of Merrill Lynchs’ website. Not to mention I can’t even get a hold of them to ask always on hold forever.

    • ANSWER:
      It depends on your other income. If your other income puts you in the 28% bracket, then YES, that is accurate. Also, if your state has an income tax, they will want part of it too. California also has a 2.5% penalty if you are not 59 1/2.

      It is common to say goodbye to 40% of your 401k if you cash it out early. It should be regarded as a last resort, not a first option.

  32. QUESTION:
    Do you have to pay taxes on 401K withdrawals after retirement if you are on Soc Sec & don’t pay taxes?
    I’m on Social Security Disability income, so I don’t pay income taxes currently. So, do I have to pay income tax if I take the whole amount out of 401K at 59 1/2, or do I have to take less than ,000?

    • ANSWER:
      Yes you probably would if the whole amount would be over a certain small amount like might possible be the below 9350 as a wild guess BUT to much unknown information to be able to give you a definite number amount that you wil have to determine on your own.
      IF you do NOT have any other income not counting your social security benefit amount and you are a single taxpayer under the age of 65 you could have other income up to the amount of 9350 free of federal income tax for the tax year 2010 or 2011.
      You will have to be very careful when you decide to take any distribution amounts from your 401K as it would possible for you to also cause from 50% to 85% of your social security benefit amount to become taxable income in the year that you would take a large amount of 401K distribution.
      SSB is the only income received during the year and no other gross income or tax exempt income then none of your SSB would taxable income in that year.
      They have a worksheet in the instruction book that you would have to use to determine how much if any of your social security would be taxable income on your correctly completed 1040 tax form.
      FRA and still working depending on all of your other sources of gross total worldwide income and tax exempt interest, dividends, etc
      To help you determine if you need to use the worksheet that is in the 1040 instruction book page 29 to determine the taxable amount that can be any amount form 50% to 85% of your SSB amount that you have received for the tax year and would have to be entered on your 1040 tax form page 1 line 20a $$$$$ amount and 20b $$$$$$ Taxable amount and added to all of your other gross income and subject to the federal income tax at your marginal tax rate.
      Go to the www.irs.gov website and use the search box for 1040 and choose instructions go to page 29 Social Security Benefits Worksheet—Lines 20a and 20b

      http://www.irs.gov/pub/irs-pdf/i1040.pdf

      Hope that you find the above enclosed information useful

  33. QUESTION:
    Forgot to report nontaxable 401k distribution on taxes – should I amend?
    I just completed and filed my taxes for 2009, only to receive a 1099-R in the mail for my 401k distribution. I completely forgot about it and was not anticipating it. Since it was a direct rollover into an IRA, it’s not taxable and will not affect what I owe or get back from the government. Should I amend my return to report it, or can I let it go? (Serious answers only please from those who have tax expertise or have faced a similar situation.)

    • ANSWER:
      I had a client who had the same situation a few years ago. He didn’t report the 1099-R on his tax return that he filed. About 6 months later the IRS sent him a letter about an audit of that particular part of the 1099-R form that was not reported.

      I would recommend amending the return so all the figures match up with what is reported to the IRS.

  34. QUESTION:
    What is the rule of SS tax on bonus? 90% deposite in 401K yet taxes SS on entire amount?
    Is that correct or should I have been taxed on the 10% left as taxable income?

    • ANSWER:
      I’m not understanding your question.
      But bonuses are taxed at a top tax rate of 25%.
      That’s why you see CEO’s getting paid 80K/year, with million dollar bonuses.
      /

  35. QUESTION:
    Is it hard to do your taxes when you have a 401k 1099. Is there anything I should be aware of?
    I’ve always done my own taxes, though this year I used some of my 401K. I was just wondering if doing your taxes was just as easy.

    • ANSWER:

  36. QUESTION:
    What are the penalties and taxes for early withdrawl/default on 401k loan?
    I left employer with a balance of approx. 4,000 on a 401k loan. What are the penalties and taxes that will need to be paid for this tax year?

    • ANSWER:
      As long as you don’t withdraw that money and invest it in some type of IRA product, you don’t owe any taxes. If you withdraw the money, then you will owe income taxes on it as well as a 10% penalty.

  37. QUESTION:
    Will I need a receipt for my tuition and 401k info when I go to do my taxes?
    This is the first year that I have had to think about the impact of a 401k or tuition on my taxes. Will I need documentation of these two things?

    • ANSWER:

  38. QUESTION:
    Do I owe California taxes on NV 401k Distribution?
    I lived in Nevada for the entire time I had a 401k. I took an early distribution and moved to California. I did actually receive the check in CA and deposited it in BofA after moving to CA. Am I really expected to pay taxes to CA for money that was never earned in CA?

    • ANSWER:
      For tax purposes, money from a 401K is “earned” (for lack of a better word) when it is distributed, in other words, when the company running the 401K sends it to you. Also, all income is subject to tax by the state where you were a resident when you “earned” (again, this is not really the correct word) it. If you were a California resident when it was distributed, then you must pay CA tax on it. If you were a NV resident when it was distributed, then you are required to report it on your CA part-year resident return, but you do not pay CA tax on it.

      It does not matter when you deposited the check. It matters only when it was “distributed”. EXCEPTION: If you deposited the check into an IRA (other than a Roth IRA) within a certain time period, then it is a rollover and no federal or state tax applies to the amount rolled over.

  39. QUESTION:
    Do I need a tax form from 401K before I file my taxes?
    I have a 401K with Merrill Lynch through my current employer. I haven’t taken any money out, only put money into it. Do I need to wait for a tax form from them before I file my taxes? I already received my W2 from my employer which says how much I put into it. Thanks

    • ANSWER:

  40. QUESTION:
    When will I have to pay taxes and penalties on my 401K distribution if I do not take it out until mid Nov?
    I am unemployed and want to have my 401K disbursed to me at this time. If I do not need to roll it over for 60 days, will I need to pay taxes and penalties on it for 2008? or 2009? I need the money now, but do not know if I will use it all. I may roll some of it over within the 60 days.

    • ANSWER:
      You pay taxes based upon the cash disbursement date. If you only need some now then I’d take part in cash and then roll over the rest in a direct rollover. Although the law says that you have 60 days to roll it over, when you take a distribution in cash the assumption is that you will not be rolling any over so they withhold 20% from total distribution.

      So let’s say you have 10k. If you took it all in cash you would receive only 8k. If you turned around and rolled 5k into an IRA you would get penalized and taxed on only 5k and since you already paid 2k in taxes you’d likely get some of that back. In other words you’d get 3k now and then maybe some later after you file your taxes.

      If you took 10k all in cash and didn’t roll any over with in the 60 day windo you’d receive 8k and be taxed and penalized on the entire 10k. You may or may not owe additional txes depending on your income and withholding from your job.

      However, if you take 5k and roll 5k over you’d only have 1k withheld and you’d get taxed and penalized on the 5k. TYou’d have 4k now and may or may not owe some slight additional tax depending on your tax level. Benefits of this scenario is that come January 1, if you need additional funds, you’d be able to take a distribution from your IRA and that wouldn’t be taxable until April of 2010. In other words, you’ve spread your tax liability.

      keep in mind that Obama wants to remove the early withdrawal penalty on 401k distributions. this wouldn’t occur until he becomes president in January so if you don’t really need the money I’d wait until then. No need to pay that extra tax if you don’t really have to.

  41. QUESTION:
    I am on Social Security Disability & the beneficiary of a 401K What will my taxes be?
    I recieved one forth of my Aunt’s 401k when she passed away last summer. We had to give half back to the estate to pay bills besides paying 15% of it to the state in Inheritance Tax! They withheld 10% of the money for income tax. Will I have to pay a percentage or claim it like income? Please help! I

    • ANSWER:
      See a professional. All taxes should have been paid at the estate level. Any withholding should be returned to you.

  42. QUESTION:
    When i make an early withdrawal from my 401k, can I elect to not have taxes taken out?
    Lets say I have, 14,xxx in my 401k. If i were to get fired or leave the company, I know the company will most likely give me the option of what to do with my 401k. If i request a check, can i elect not to have taxes taken out? I know i have to pay taxes eventually but I wonder if I can just deposit it into my checking account and payoff some credit cards. thanks!

    • ANSWER:
      Normally, when you receive 401k payments early, the taxes are automatically taken out because there is a ten percent penalty that you will already be paying for taking the money. There is no way to elect no taxes be taken. I separated from my company two years ago, and received all monies in my pension and 401k. To elect no taxes was not even an option.

  43. QUESTION:
    If I withdraw all of my 401k, what would be the penalty fee & taxes?
    I’m a 30 year old recently unemployed NY State resident and I need the money in my 401k because I will be out of a job for a considerable amount of time. I currently have about 00 in my 401k, if I were to withdraw the full amount how much would the early withdrawal penalty be as well as the federal & state taxes?

    • ANSWER:
      You’ll have to treat the entire amount as taxable income in the year you withdraw it, so it’s taxed at whatever your marginal tax bracket is. The early withdrawal penalty is an additional 10%, or 0. If you can qualify for a loan at your local credit union or something it’s going to cost you much less.

  44. QUESTION:
    I deposited a check from a 401k that I was changing and they took out taxes. Will I get penalized?
    I deposited a check from a 401k that I was changing and they took out taxes. Will I get penalized for receiving the check and then depositing it into another 401k account even though they already took out the taxes?

    • ANSWER:
      There is a time limit on how long you wait to re-invest the money into another account. If you don’t re-invest it in another 401K, you will be charged 10% penalty. The correct way to do this would have been to have the account transferred from the old 401K (with no check written to you personally) to your new 401K account, but it’s too late for this now.

  45. QUESTION:
    What are the taxes and penalties for cashing out some of a 401K?
    I have too much credit card debt and was considering using a portion of my 401k to pay off the cards in full. I have never done that before, and since the 401k is with my former company, I can’t take out a loan so my only option is to cash out some and roll over the rest to an IRA.

    Does anyone know the taxes & penalties the IRS would charge for that, and have an opinion about whether that was a good strategy?

    • ANSWER:
      20% of the amount taken in cash will be withheld for Federal Income Taxes. However, you won’t know your actual tax rate until you prepare your taxes next year. The cash withdrawal gets added to all of your other income and taxed at that rate. Once you’ve determined your taxes you’ll add a 10% early withdrawal penalty to that tax owed. 10% of the cash piece, not the rollover piece. This will get you to your total tax. Add your withholding piece to your withholding from your job to get total withholding. If total tax is higher than total withholding then you owe more. If it’s not, you’ll still get a refund.

      It’s not a good strategy…better to stop making 401k contributions and apply that to debt then to take a withdrawal, increase your taxes owed, and owe a 10% penalty. That being said, at least you’re only taking what you need and rolling the rest…I’d equate that to hitting your finger with a hammer rather than smacking your entire hand.

  46. QUESTION:
    What % should I withhold for state taxes when taking a lump sum distribution for my 401k?
    I am taking a lump sum distribution from my 401K (job change). I know it’s not the best choice for my future, but circumstances require it. I know I will have 20% taken in Federal Income Tax, and a 10% early withdrawl taken, but should I withold some $ for State Taxes? If so, how much is it for WI residents?

    Thank you all!

    • ANSWER:
      I would ask your 401k administrator. They have all the information they need at their finger-tips as to state taxes to withhold. Unfortunately, with WI the state tax percentage varies by income level, between 4.6% and 6.75%. If I were you I’d have them withhold 7% even. That way you will probably get money back in the spring if they withheld too much.
      Also, with regard to the Federal, you can also have them withhold a little extra for Federal as well. I’d recommend this, as it hurts too much to take a hit later than have a lump sum reduced by a little more in the beginning. That’s just my experience.

  47. QUESTION:
    What are the taxes and penalties if I take money from a 401K account?
    I am in the middle of a divorce and do not have a job. I will get half of a 401K account but it looks like I have to use that money to pay bills and find a place to live. What are the taxes and penalties if I take the money from the 401K instead of rolling it over?

    • ANSWER:
      It will be treated like income and there will be a 10% penalty.

      Before you spend any, do a mock tax return and figure out the bill.

      The custodian will withhold 20% (1/2 for tax and 1/2 for penalty). If you have ZERO other income, you may come out okay. However, if you take too much and have no kids, you could owe when tax time rolls around. The 10% tax rate only goes up to 50 of taxable income.

  48. QUESTION:
    How do I report 1099-R income related to 401k rec’d in 2007 and reported in 2006 Taxes?
    I received distribution of a portion of my 2006 401k contributions in early 2007 because of failure of 401k plan for high income earners. I reported this on my 2006 taxes. I received a 1099R in 2008 for 2007. How do I report this since I’ve already included it in 2006 taxes?

    • ANSWER:
      Since you reported it in 2006 you’re done. It should have a code P on the 1099-R. This tells the IRS that it was a prior period payment and they should go back to the prior year to ensure that it was added to income.

  49. QUESTION:
    Do I claim a 401k loan on my 2010 taxes?
    I took out a loan in 2010 from my 401k. I was automatically put on a payment plan over 5 years that takes the payment from my paycheck every two weeks to pay back the 401k. Is this loan considered income that I should be paying taxes on?

    • ANSWER:
      No, loan is not an income. So you do not claim this.

      http://taxipay.blogspot.com/2008/08/elective-deferrals-401k-plans.html

  50. QUESTION:
    If i took out of my 401k due to illness , & job loss do i have to pay ny state taxes? the 401k was taken out?
    twice the second time closed out.
    Age 50, no other income
    & would these circumstance also effect my federal taxes?

    • ANSWER:
      You will have to pay Federal and NY state income tax on this distribution. There is also a 10% Federal early distribution penalty for taking the money out before age 59 1/2. There are some exceptions to the 10% penalty (but not the income tax itself), such as if you are permanently disabled or have medical deductions in excess of 7.5% of your adjusted gross income. Read more in IRS publication 575.