How are 401(k) withdrawals taxed
when you start taking money out of them? Let's say, for example,
you have contributed $10,000 (pretax dollars and you never claimed
any deductions on your income tax over the years) to your 401(k).
Your employer puts in another $5,000 and over the years some of
the investments have had dividends that were reinvested. Now you
are 60 years old, and your 401(k) is worth $50,000.
Do you have a capital gain of $40,000 to pay taxes on if you take
all the money out?
Do you have to somehow add up all those dividends
that were reinvested? Do you have to have every statement showing
every transaction that happened over the 20, 30 or 40 years you
have had this 401(k)? What if you don't have them all?
What if you have "rolled over" or consolidated
two, three or four of them into one account? Is the taxation different
if you take the regular mandatory withdrawals each year? I can't
seem to find this information anywhere on the IRS Web site. Is it
there somewhere? Is it the same for federal and state taxes? (I
live in Missouri.) Thanks.
The definitive IRS guide to understanding income
from your pension plan is Publication
575. Generally the bottom line is that all withdrawals from
your pension, whether periodic or in lump-sum form, are fully taxable
as ordinary income. Pension plan distributions are never capital-gain
income regardless of how the funds grew or accumulated in the plan.
The only exception to the full taxation of the plan
payments would be if you made post-tax dollar contributions to the
plan. You say you only made pretax contributions, which were not
deducted on your return. Pretax contributions are actually not deducted
on your return but instead reduce the amount of wages that you report
as income on your return. Since you do not have post-tax savings
in the plan, all of your withdrawals will be taxable. This means
that the dividends reinvested and all the plan statements you received
do not affect the taxability of the payments, so that they're meaningless
to your tax consequences. Or in other words, if you want to, you
can throw them out.
you consolidated your 401(k)s into one or more accounts, you can choose from which
account to make withdrawals. But the tax consequences remain the same.
Mandatory withdrawals must begin when you turn 70½
years of age. If you withdraw money prior to this age (but after
age 59½), the taxation is the same: It's still ordinary income.
Usually, most states use your
federal taxable income as a basis for computing your state taxable income. Unless
Missouri provides a special exclusion for pension income, your state income tax
consequences would be the same as the federal.