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Author: cougarsc Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75383  
Subject: 401(k) Tax Question Date: 11/12/2002 9:31 AM
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How are you taxed on your 401(k) and in roll-over situations?
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35206 of 75383
Subject: Re: 401(k) Tax Question Date: 11/12/2002 9:50 AM
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How are you taxed on your 401(k) and in roll-over situations?

If you do a direct rollover to your IRA or your new employer's 401k, there is no tax. You will, however, get a 1099-R at the end of the year, and will have to report the rollover on your tax return.

If you have the 401k funds sent to you, your 401k plan administrator is required to withhold 20% for income taxes. If you then decide to roll that over within 60 days, you will be missing the 20% that was withheld. You'll either have to make that up from other funds, or pay tax on that amount, including any early withdrawal penalties that might apply. The IRS will give you credit for the withholding on your tax return just like they do for withholding from you paychecks.

Bottom line: have the money sent directly to your rollover IRA. It's much simpler.

--Peter

PS. Some administrators will make a rollover check payable to your new IRA but send the check to you rather than the IRA. That's fine - they don't need to withhold the 20% in that case. Just send the check (along with any account paperwork the IRA may need) to the new IRA account. But double check everything to make sure there was indeed no withholding.

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