If you have a 401(k) retirement account at work, you decide how much to contribute and your employer takes it out of your paycheck. The company may add money of its own to your account and match some of all of your contributions. There's no income tax on 401(k) contributions, though you do pay other taxes such as Social Security. However, you pay income tax on withdrawals.
Reporting the Money
You can start taking withdrawals from a 401(k) penalty-free at 59 1/2. After turning 70 1/2, you must take regular withdrawals each year. There's no Social Security tax on withdrawals, just income tax. After the year ends, the 401(k) administrator sends you a 1099-R form showing how much you withdrew. Enter this amount on your Form 1040 on the line for pension and annuity income. Where the form asks for the taxable amount, you normally put down the entire amount withdrawn.
Figuring the Tax
There's no special tax treatment for regular 401(k) withdrawals. You report it as taxable income, adding it in with wages, alimony, self-employment earnings and other income on the front of your 1040. Whatever your regular tax rate is, you apply it to the 401(k) withdrawals. If you withdraw enough to put you into a higher tax bracket, you will pay a higher rate on part of your income.
Your 401(k) may let you withdraw money before you turn 59 1/2 if you're in extreme financial need. The price is an extra 10 percent penalty tax on the money. You report early distributions on the first section of IRS Form 5329. Use Line One to list the entire amount you took out. If some of the money is exempt from extra tax -- withdrawals due to permanent disability, for instance -- list that amount on Line Two. Subtract Two from One. Apply the 10 percent tax to the result and report the added tax amount on Form 1040.
If you leave your job and transfer your 401(k) to a personal IRA, there's no tax on the transfer unless you take longer than 60 days to roll the money over. If that happens, you pay tax as an early withdrawal. Should you leave your job after you turn 55, you can withdraw from a 401(k) without paying the 10 percent extra tax. You do pay regular income tax, which you report on your 1040.
- IRS.gov: 401(k) Resource Guide - Plan Participants - 401(k) Plan Overview
- IRS.gov: 401(k) Resource Guide - Plan Participants - General Distribution Rules
- Social Security Administration: Income From Pensions, Annuities, Interest, And Dividends
- IRS.gov: 1040 Forms and Instructions
- IRS.gov: Instructions for Form 5329
- IRS.gov: Form 5329