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Would one of you tax savy fools please tell me which IRS Publication explains the individual taxes due on 401K distributions?
thanks,
willy
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willy1ken:
Not being a smartas* but it is IRC Sec. 401k that explains the rules. Generally, if 100% of what you set aside before tax is the only thing in the account, everything that comes out will be taxable to you at Long Term Capital Gains rate if held for > 12 months. If you mixed the account with before and after tax contributions, you will need to account for the after-tax portion so that the IRS doesn't tax you again.

If you take a distribution before age 59 1/2, you will face tax and a penalty unless it is used for one of the exceptions (health, 1st home, etc.) Of course, if you roll the account into an IRA you are not required to take a distribution from the account until age 70 1/2. If you use the IRA option,I highly recommend creating a NEW IRA (not a previuoly funded one) to handle the rollover in case you decide to work for another company that will let you roll your proceeds into their retirement plan.

Very confusing I know so contact me directly if you have other questions.

AW
WRMorris@stewart-eng.com
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I'mn sorry but I have to disagree streniously. §401(k) is the IRC code section that enables the creation of a 401(k) plan. It is §72(t) that governs respects the taxation of distributions. Further, but for some unusual situations, all distributions from a 401(k) plan, but for your own after-tax contributions, are taxed as ordinary income, not long term capital gains, irrespective of holding period.

§72(t) applies ordinary income tax rates, plus 10% to all "deferred" account distributions including 401(k) plans. §72(t)(2) then provides approx. 10 exceptions to rule, e.g. circumstances under which you escape the 10% surtax but are still required to pay regular income tax rates. The execeptions are, in general: attaining age 59 1/2, death, disability, etc.

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My apologies in that I didn't answer your original question in my first responding post. Please see Pub. 590. It can be downloaded from form the IRS website @ www.irs.gov.

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AuroraWest writes (in part):

Generally, if 100% of what you set aside before tax is the only thing in the account, everything that comes out will be taxable to you at Long Term Capital Gains rate if held for > 12 months.

I reply:

Would that it were so! In fact, distributions from a 401(k) plan are taxed as ordinary income, not at capital gains rates, no matter how long you have held the property. --Bob
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Would that it were so! In fact, distributions from a 401(k) plan are taxed as ordinary income,
not at capital gains rates, no matter how long you have held the property. --Bob


I 2nd that. However, if you're 59 1/2 you can take a Lump Sum Distribution and tax it on form 4972 at special lower 5 year avergaing this year. After 1999 you'll have to be born before 1936 and can use 10 year averaging. Ed
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Bob:
Mea Culpa. You are, of course, correct. I was working all day with IRA accounts when I answered the questions and had a complete "brain flub."

Thanks for setting the record straight,
AW
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