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401K Withdrawal - Over 59-1/2 - Tax Consequences


Guest shaeffer

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Guest shaeffer

My husband took a $25,000 withdrawal from his 401K plan in April of this year. He is 60 and was over 59-1/2 when he took the money. They withheld $4,206.05 for IRS. Roughly 8,000 of the withdrawal came from employee before tax. The rest came from Employer Profit Sharing. What will be the tax consequences be for this? He is still employed by the company. They did list it as a hardship withdrawal on the check receipt.

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by law most distributions will have 20% withholding tax at the time of distribution if paid directly to the participant. whether the distribution is fron deferrals or profit sharing, this is all money that has not been taxed at the time it was put into the plan. (Some plans allow post-tax contributions, but you did not indicate this)

you should receive a 1099R in the mail by 1/31 indicating the amount of distribution and the amount of taxes paid. You add these figures in the appropriate spots on your tax form. (Thus, if total income is in the 15% tax bracket, you would get back taxes because you already 20%)

Because your husband was over 59 1/2 when he took the money there will be no additional 10% penalty that happens in many cases to people because of early withdrawal penalty tax.

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Tom's answer is right. But the arithmetic of the distribution escapes me. A distribution of $25,000 should have had $5,000 federal withholding, but it seems that did not happen. It would be less if there was post tax money involved, and it would be more if there was some state withholding included. I'd be interested in knowing what the 1099-R shows.

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Guest shaeffer

HI RCK. Your right about the arithmetic. I had questioned that too. I thought that it was an automatic 20% withdrawal for taxes and I couldn't make this add up either. Thats kind of the reason why I had posted. We have not received the 1099-R yet. I'm waiting. We would have a healthy refund this year, with stock losses and all, but this $25,000 is going to set it back quite a bit I think. I will let you know when it comes. There was no state tax withheld and no post-tax involved that I know of. I'm just looking at the receipt from the check at this point. Meantime, what is this going to be claimed under - dividend income, distributions, what? I've tried it several different ways to get an idea but I am at a loss. Thanks for replying.

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I must have been asleep - at least I did not answer fully the question. There is no 20% withholding on the deferral portion received as part of the distribution. (or rather I think its optional for 1999.) IRC 402©(4)©

The withholding is 10% (I thought I had read there was none, but now when I look I see there is a 10% withholding rule. 3405(B)(1)non periodic payment)

so distribution was

25000 = 8000 deferral + 17000 other

10% of 8000 = 800

20% of 17000= 3400

total tax 4200.

ok, I came up with their number, but now I am not sure if even that is correct!

Bear with me, please! There is 20% withholding if the distribution is eligible for rollover. There is only 10% withholding on the deferral portion due to change in law.

However, I see that if there is another statutory distribution event then the distribution is an eligible rollover. Since your husband was 59 1/2 at the time of the distribution that becomes a distributable event and therefore subject to the full 20% withholding.

Leave it to the govt to confuse and amuse. It looks like an attempt was made to calculate the correct withholding but an honest mistake was made!!!!

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To answer your question about reporting, you'd put the distribution amount in line 16a if you're using Form 1040 ("Total pensions and annuities" and "Taxable Amount").

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Guest shaeffer

Tom, thank you so much for all that information. I don't understand it all, but I do understand that they did not hold back enough for federal withholding and none for state. Hopefully, we will get the 1099-R in the next couple of days and we will have a final answer. I appreciate your taking the time to explain all this. We do our own taxes with the Turbo Tax program and have found it to be really easy to use. I was just stumped over this because as you say there are so many rules that apply. And thanks to all of you for your help. I will post how it all works out.

Sandy

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I should of added the 10% withholding is not done if a w-4p is filled out waiving the 10% tax. It wouldn't appear in your case. Either way, you have to pay taxes up front or at tax time, so you can only delay the inevitable for so long.

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I must be missing something. The arithmetic that Tom went through does not apply to rollover-eligible distributions, and does not apply to periodic distributions. What does that leave other than required minimum distributions?

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if ee had been 50 and took the hardship I think the arithematic makes sense.And because it seems to arrive at the same answer for taxes that was indicated, I am guessing that was how the calculation was done. because the ee was 59 1/2 i think they goofed and should have withheld more taxes as you calculated.

Hardships from deferral $ are not considered eligible for rollovers as of 1999.

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The 20% should have been withheld on the entire amount. In service distributions (from any contribution source)after age 59 1/2 are eligible rollover payments, regardless of whether they are only allowed due to financial hardship or not. The fact that the distribution was classified as a "hardship" on the check does not change anything.

I would ask for a detailed run down of how they calculated the taxes.

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I think Tom has figured out the arithmetic. This raises an interesting question, though. What if the the plan does not permit age 59 1/2 distributions of before-tax dollars? That is, what if the plan requires that all distributions of pre-tax dollars are subject to hardship requirements? Section 401(k)(2) does not require a plan to allow unfettered distributions at age 59 1/2.

Would a distribution of pre-tax dollars from such a plan after age 59 1/2 be an eligible rollover distribution under section 402©(4) or not?

card

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  • 16 years later...

I appreciate all the info posted in this thread.I am 63 going on 64.I was surprised as I had an emergency pop up where I was injured pretty badly and was out of work for a year.Needless to say the amount of worker comp was 30% of my normal income.

My credit was in ruins.From reading this before my credit was destroyed with a credit score of 510.I forgot about my 401k

I did not have a great amount in there but I had enough to make a withdrawal and pay my creditors.I always have paid my mortgage but all of my other bills were way behind,

Now my credit score has moved up to 670 and I am working again even though I am only making 60% of my old income.

Thank you it shows people can learn something from such and old post

Thanks

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  • 9 months later...

Hi, Pardon me for asking this question that I think has already been answered above. Its a question I've asked 2 brokers and TurboTax rep - but they don't seem to know the answer.

Scenario: I am over 60 and suppose I quit my job at the end of the year (no income work income after that) and I withdraw 50K from my 401k for the purpose of living off for the entire year. The tax as I understand would be 20% or 10K. As I am in the 15% tax bracket, should I not get 5% or 2.5K of that back the next year when I file my taxes?

Thanks for your help

 

 

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There is no way to accurately answer your question via this board.   What makes up your final tax bill is complex.  The only way to do it would be do a draft 2017 tax return putting all of your information in it. 

You are correct the withholding on the withdrawal would be 20%.  

Can I suggest you go and pay for some tax advice from a CPA or tax prep person who can look at your whole situation, all your data and give you sound advice.  The amount of money you are talking about a couple hundred dollars is a small investment in advice that could more then pay off in the long run.

I would also recommend not taking it all at once (which could be enough money to put you in a higher tax bracket) but put it all in an IRA say at a local bank.  You can then take out what you need month by month.  It wouldn't be a taxable event until you take it out of the IRA.  There is no mandatory withholding from an IRA which might be a bad thing as you could owe a lot the following April 15th.  This way if you need less for any given month you can leave it in the IRA and not have a taxable event- might also make it less tempting to go to Vegas and blow it all!  :D

But a good tax advisor could help you work out these kinds of details including how to not have any surprised come April 15th. 

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You have the basic idea, but as ESOP notes, it is the details where you need to be careful, and which makes it impossible for us here to answer your question as a yes or no.

Many people misunderstand the 20% - the 20% is not the TAX, per se, but is simply WITHHOLDING. So when you ultimately file your tax return, this 20% withholding will either mean you get a bigger refund, or owe less. The 20% withholding doesn't exist in a vacuum. 

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