As far as i know 401k distributions are always counted as income and taxed at ordinary tax rates. A person brought up the point that they are not and i completely disagree with him or her. They say that the section in the tax code 402(e) 4 contains a provision which allows distibutions to be taxed at capital gains rates. I read the 402(e) section and it talks about employer stock held in a trust which, if elected to be taken out, is added on to income. After this is done the stock grows tax deferred and is only taxed at CAP GAINs rates. I agree with this. It is just like purchasing stock from the stock market and but youre buying your employers stock with after tax dollars. Same thing applies to 402(e). It is not a 401k but if the employer stock was held inside the 401k the distributions will be taxed at regular income tax rates. I do not know of any way that a DEDUCTIBLE 401k can grow tax deferred and at the END or Retirement be taken out and given prefferential CAP GAINS treatment. If I am wrong please advise. An example would be putting 10000k in a 401k (buying employer stock)for 30 years and then at the end take the money out in a lump sum distribution which at that time lets say was 3,000,000. Now the basis gets taxed at ordinary income tax rates which is the 300000. then the rest or the 2.7 million gets taxed at cap gains rates? This does not sound like it would be allowed by the government but i could be wrong.
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