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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Re: 401K Withdrawals Date: 5/10/1997 12:59 PM
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On Wed, 07 May 97 20:38:13 -0600, majr wrote:
<<Can anyone tell me how gains are calculated when w/drawing funds from 401k's?. If I roll over my account from one employer to another, and so on,how do I keep track of the gains? Also, all of the funds are taxable, i.e. pre-tax. >>

As PapaDoc pointed out, a transfer of 401k monies to a new employer's qualified retirement plan is not a distribution. Accordingly, provided you had no constructive receipt of that money prior to the transfer, there are no tax impacts to you at the time of the transfer. But that gives rise to what is "constructive receipt?"

The IRS will consider you to have constructive receipt of 401k proceeds if you cash out of that plan and have a check made out in your name sent to you by the plan custodian. On receipt, you have 60 days to "rollover" that money to an IRA or a new employer's qualified retirement plan (assuming the latter plan allows such deposits, and not all do). Failure to do so means the entire amount of the 401k distribution will be taxed to you at ordinary income tax rates. If you are under the age of 59 1/2, you will also be assessed a 10% excise tax (commonly called the "penalty") on that amount as well. Please note that on a distribution from a 401k (or an IRA funded with pre-tax dollars for that matter), all the monies taken are considered ordinary income and will be taxed as such. There is no recognition for capital gains or losses except in exceedingly rare cases, and then only for IRAs to the best of my knowledge. Thus, there is no need for you to worry about calculating gains within a 401k. As far as the IRS is concerned, it's all ordinary income.

So, o.k., you get the check and do the smart thing. You roll the money to an IRA or a new employer's qualified plan within 60 days. You're home free, right? Wrong!! You forgot something. When the plan custodian sent you the check, by law 20% of the distribution was withheld against your potential tax bill for the year. Unless you restored that missing 20% from other money you found lying around, added it to the distribution check, and then rolled all of it to an IRA or qualified plan, you received a distribution whether you think so or not. If you failed to do that, then the IRS will say the missing 20% was a distribution to you even though you never saw it. It will tax you on that amount and apply the 10% excise tax as well depending on your age. You can avoid all that hassle, though, by not taking the money yourself. Just arrange for a custodian-to-custodian direct transfer. Your old and new custodians should be able to guide you through this procedure. It's the safest way to handle 401k transfers.

Regards...........Pixy
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