Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! . Your feedback or suggestions on future articles is welcome.
Upon leaving a job, you may be interested in taking a withdrawal from your 401k plan. The taxation on that withdrawal is as varied as it can get. There are rules, and then there are of course exceptions to those rules! Before you effectuate your withdrawal, first find out how you’ll be taxed and what effect it will have on your income! Here are a few useful nuggets of information on the taxes:
- A direct rollover to another qualified retirement plan (i.e. 401k, 403b, 457, IRA) is non-taxable. You’ll receive a 1099-R at the end of the year with a tax code of “G”, which indicates that you rolled over the money.
- A withdrawal prior to age 59.5 will be subject to income tax plus an additional 10% early withdrawal tax penalty. Your retirement plan will be required to withdraw 20% in federal income tax plus any applicable state taxes.
- A withdrawal after age 59.5 will be subject to income tax, 20% of which will be deducted up front.
Exceptions to the rules:
- If you withdraw money, but later deposit it to a qualified plan within 60 days, it will be considered an indirect rollover,and you’ll be able to reclaim any taxes when you file your personal tax return at year end.
- If you take a distribution after separating from service at age 55 or older, the 10% penalty is waived. To qualify for this, your termination date has to be after you turn 55 years old.
- If you establish installments or periodic payments, the upfront 20% federal tax no longer applies.The withdrawal will still be added to your taxable income, but you no longer have to have the 20% taken out, as you can specify a different amount.
Listed above, are just a few of the rules, if you were permanently disabled, born before 1936, withdrawing company stock, then even more exceptions may apply. One thing that is almost guaranteed is that anytime a check is made out to you from your traditional 401k account, you’re going to be paying some type of tax on it!
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