401_k_istock479882934.jpg

Are 401(k) withdrawals considered income?

A:

All 401(k) plan withdrawals are considered income and subject to income tax, including capital gains. When you take a premature distribution – a withdrawal before age 59½ from a 401(k), IRA or any other tax-deferred retirement account or annuity – that withdrawal is also subject to an extra 10% penalty tax from the Internal Revenue Service (IRS).

When a 401(k) Loan Becomes a Taxable 401(k) Withdrawal

Some 401(k) plans let you take out loans from up to 50% of your available account balance. If you cannot pay back the full balance of the loan within five years, then it is considered to be a withdrawal and is subject to income tax. If you are under age 59½ at that time, then that early distribution is also subject to the 10% penalty fee.

Another instance in which a 401(k) loan becomes a taxable 401(k) withdrawal is if you cannot pay back the remaining balance of the loan upon termination of employment.

Exceptions to the Extra 10% Penalty Tax

While all 401(k) distributions are subject to income tax, there are several exceptions to the extra 10% penalty tax. One is if you roll over the funds into another qualified retirement plan (see Are 401(k) rollovers taxable?).

Another concerns health-related costs. If the amount of your unreimbursed medical expenses is more than 10% of your adjusted gross income (AGI) (7.5% if you are 65 or older) and you take a distribution from your 401(k) to cover those expenses, then the IRS exempts you. When you take a loan from your 401(k) you might open a separate checking account to deposit the withdrawal and make the medical payments. By keeping a detailed paper trail of the use of your 401(k) funds, you can be ready in case of an audit.

This is a paid-for submitted press release. BLOCKCHAINFEEDS DOES NOT ENDORSE, NOR IS RESPONSIBLE FOR ANY MATERIAL INCLUDED BELOW AND ISN’T RESPONSIBLE FOR ANY DAMAGES OR LOSSES CONNECTED WITH ANY PRODUCTS OR SERVICES MENTIONED IN THE PRESS RELEASE. BLOCKCHAINFEEDS URGES READERS TO CONDUCT THEIR OWN RESEARCH WITH DUE DILIGENCE INTO THE COMPANY, PRODUCT OR SERVICE MENTIONED IN THE PRESS RELEASE
Shares 0

Jackson Neo has written on money, investing and risk management for more than a decade. His current interests are cryptocurrencies, fintech, and micro-finance.