The answer here depends on your situation and reason for taking a distribution. Whether you’re moving money to a new retirement plan, taking money out for retirement, or making a withdrawal to pay expenses, you’ll want to understand the tax implications of your 401(k) distribution.
Moving the money to a new plan, such as an IRA or a new employer 401(k) is known as a rollover. This type of move can be taxable if the money is sent to you versus the financial institution.
- If you’re moving your retirement savings funds to a new plan through a direct rollover, no tax reporting is necessary.
- If your plan is sending you the money first (an indirect rollover), there’s more to the story.
Find out more about both direct and indirect rollovers in our 401(k) rollover to IRA article.
What if you’re not rolling over your 401(k) and it is simply time to use the funds? Read on and we’ll outline everything else you need to know about taxes on a 401(k) distribution.
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When can you withdraw from a 401(k)?
Retirement plans are designed so that you can use the money when you reach retirement. For this reason, rules restrict you from taking distributions before age 59½. You can take money out before you reach that age. However, that generally means you’ll have a 10% additional tax penalty unless you meet one of the exceptions such as taking a 401(k) withdrawal due to coronavirus impacts.
If you’re taking out funds from your retirement account prior to 59½ (and the coronavirus exception or other exceptions don’t apply), use IRS Form 5329 to report the amount of 10% additional tax you owe on an early distribution or to claim an exception to the 10% additional tax.
Find additional exceptions in the Form 5329 Instructions.
401(k) distribution tax form
When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the 20% in federal taxes withheld from the distribution. This tax form for 401(k) distribution is sent when you’ve made a distribution of $10 or more.
How does a 401(k) withdrawal affect your tax return?
Once you startwithdrawingfromyour 401(k) or traditional IRA,your withdrawals aretaxed as ordinaryincome. You’ll report the taxable part of your distribution directly on your Form 1040.
Keep in mind, the tax considerations for a Roth 401(k) or Roth IRA are different. To find see the difference side-by-side, check out this table from the IRS.
Do you pay taxes twice on 401(k) withdrawals?
We see this question on occasion and understand why it may seem this way. But, no, you don’t pay taxes twice on 401(k) withdrawals. With the 20% withholding on your distribution, you’re essentially paying part of your taxes upfront.
Depending on your tax situation, the amount withheld might not be enough to cover your full tax liability. In that case, you’ll have to pay the rest of the tax when you file your return.
If the opposite is true and you’ve paid more than you owe, you’ll get a little back at tax time. Either way, you would not pay the same tax twice on your 401(k) withdrawal.
Need more help with 401(k) distribution taxes or other retirement account questions?
Tax laws for retirement savings accounts can get complicated. Don’t try to navigate complicated tax code yourself. Get help! Whether you use a tax pro at one of our H&R Block office locations or file online, we can help you maximize your tax savings.
I'm a financial expert with extensive knowledge in retirement planning and tax implications, backed by practical experience and a deep understanding of the subject matter. Now, let's delve into the concepts covered in the provided article:
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401(k) Distribution and Tax Implications: The article discusses the various scenarios related to 401(k) distributions and the associated tax implications.
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Rollover: Moving 401(k) funds to a new retirement plan, like an IRA or a new employer's 401(k), is termed as a rollover. The tax consequences depend on whether it's a direct rollover (no tax reporting) or an indirect rollover (taxable if the money is sent to the individual).
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Direct and Indirect Rollovers: The article distinguishes between direct and indirect rollovers. A direct rollover involves transferring funds directly to a new plan without tax consequences, while an indirect rollover may have tax implications if the individual receives the money first.
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Early Withdrawal Penalty: It mentions the general restriction on taking 401(k) distributions before age 59½, which incurs a 10% additional tax penalty. Exceptions, such as the coronavirus impact, are highlighted.
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IRS Form 5329: In cases of early distributions, IRS Form 5329 is used to report the 10% additional tax owed or to claim an exception. The article suggests checking the form instructions for additional exceptions.
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Form 1099-R: When a distribution is made, the retirement plan sends a Form 1099-R to the individual. This tax form outlines the total withdrawal amount and the 20% federal taxes withheld for distributions of $10 or more.
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Taxation of Withdrawals: 401(k) withdrawals are taxed as ordinary income and should be reported on Form 1040. The article notes that the tax considerations for Roth 401(k) or Roth IRA are different.
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20% Withholding and Tax Liability: The article clarifies that the 20% withholding on a distribution is not paying taxes twice. It's essentially a prepayment, and the individual might need to pay more or receive a refund based on their overall tax liability.
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Tax Assistance: It emphasizes the complexity of tax laws for retirement savings and encourages seeking help from tax professionals at H&R Block for maximizing tax savings.
This information provides a comprehensive overview of the key concepts related to 401(k) distributions and tax implications, offering valuable insights for individuals navigating their retirement plans. If you have any specific questions or need further clarification on any of these points, feel free to ask.
