401k tax

[Guest luuuliu]

I would like to find out whether one should keep tracking the transactions in the 401k or 401k rollover account for taxation purpose at distribution.

Thanks,

Lu

[BPickerCPA]

No need to.

[Guest luuuliu]

Barry:

Thanks for the answer. Can you explain briefly the reason?

Lu

[david rigby]

Briefly, it's all pre-tax money, so all of it is subject to taxation when paid out.

[John G]

While you do not need to keep track of transactions for taxation purposes, you should have some rudimentary system for keeping track of your investment decisions to understand your results.

For example, you might want to keep a simple log of purchase date, shares and total amount and the same info at time of sale. This way you can have a general idea of your annual return.

I also recommend that you always know the percent allocation to each investment or investment class (bonds vs cash vs equities). It is not uncommon for someone to have 8 investments but for two to account for 80% of the assets. If you are visually oriented then a pie diagram will be helpful.

This advice holds for both stocks and mutual funds. Failure to keep track of your investments is a primary factor in poor results. I am amazed at the number of people who don't read their monthly/quarterly statements or file them away in a three ring binder. Don't rely on your custodian to do your job.

Conclusion: focus on your needs for records, this is not an IRS issue

[Guest luuuliu]

Thanks for the advice, John.

What tax rate will be applied at distribution - long term capital gain rate, short term capital gain rate or your income tax rate at distribution?

Thanks,

Lu

[david rigby]

In general, amounts that come out of an IRA or a 401(k) plan (or any qualified pension or profit sharing plan) are taxed as ordinary income. That is because they are (with respect to the tax laws) "deferred compensation". However, they are not subject to FICA (Social Security) taxes.