How Much Tax Do You Pay on 401(k) Withdrawals?
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- เผยแพร่เมื่อ 5 ก.ค. 2024
- How much tax do you pay to get money out of a 401(k) or pre-tax retirement account? It depends on several factors. Most importantly, you want to be aware of:
✔️ Income taxes
✔️ Penalty taxes for early withdrawals
✔️ Tax withholding
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The amount of income tax you pay on 401(k) withdrawals depends on everything happening on your return. For example, income from work, investments, Social Security, and other sources can raise your income level. That might put you into a relatively high bracket.
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At the same time, any deductions, including the standard deduction, can reduce the taxes. You might even be able to get retirement money without paying taxes in some cases.
Of course, your age is important, as penalty taxes can increase the tax bite. That’s usually only when you’re under the age of 59 ½, but there are exceptions and wrinkles to be aware of-they might help you avoid paying that tax.
More Resources:
Calculator to estimate taxes due: www.aarp.org/money/taxes/1040...
Penalty tax exceptions: www.irs.gov/retirement-plans/...
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CHAPTERS:
00:00 How Much Tax Do You Pay?
00:30 Pre-Tax Withdrawals Are Ordinary Income
01:02 Income Tax
01:27 Penalty Taxes
01:48 Tax Withholding
02:29 Examples on Tax Return
05:22 Social Security Taxation
06:25 Is it a Taxable Withdrawal?
07:12 More on Taxable Income
09:00 Tax Brackets and Rates
11:35 Why Income Matters
12:08 Withholding and Penalties
15:07 Exceptions to 10% Penalty
We’ll walk through the key points and a few examples in this video. But it’s critical to review your situation with a tax expert before making any decisions, taking withdrawals, or filing a return. Your reality might be significantly different from what this video describes, so you need to triple-check everything.
Justin Pritchard, CFP® is a fee-only fiduciary advisor who can work with clients in Colorado and most other states.
IMPORTANT:
Retirement account withdrawals can complicate income taxes (both federal and state), tax penalties, underpayment penalties, and more. It's impossible to cover everything you need to know in a video like this. The only thing that's certain is that you need more information than this. Always consult with a CPA before making decisions or filing a tax return. This is general information and entertainment, and is not created with any knowledge of your circumstances. As a result, you need to speak with your own tax, legal, and financial professional who is familiar with your details. This video is not a substitute for individualized, personal advice. Please verify with your plan administrator when employer plans are involved. This information may have errors or omissions, may be outdated, or may not be applicable to your situation. Investments are not bank guaranteed and may lose money. Opinions expressed are as of the date of the recording and are subject to change. “Likes” should not be considered a positive reflection of the investment advisory services offered by Approach Financial, Inc. The Comments section contains opinions that are not the opinions of Approach Financial, Inc., and you should view all comments with skepticism. Approach Financial, Inc. is registered as an investment adviser in the state of Colorado and is licensed to do business in any state where registered or otherwise exempt from registration.
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Note: I do not discuss offerings, pricing, etc. in these comments. Please proceed to the website, where you can find a substantial amount of detail.
Thank you for this video. There seem to be countless videos on saving for retirement but not as many about what to do when you are retired in regard to taxation.
This is A+ content. Thank you
Great video. Thank you for sharing.
I found this video very helpful. Thank you.
This is why Asset Location is so important, having an efficient mix amongst your taxable, tax-deferred, & tax-free buckets of money will allow individuals to take greater control over the risk of higher taxation. Also, it’s worth mentioning that the standard deduction offsets taxable income in retirement as well as the 0% capital gains / dividends rates for married couples whose income doesn’t exceed $89,250.
Perfect response and it should have been forefront in this video. How you allocate resources prior to retirement is more important than how you withdraw those resources after. Always check ALL IRS definitions of income and THINK about the effects of the tax bracket vis a vis the options those allocations provide.
Between 12-14 % on Fed. 0% on State. I live in Georgia.
Thank you for your video
Thanks for the info.
I have so little when I withdraw a monthly small amount to help feed me , that once the standard deduction is taken off there's not enough income to be taxed.
It would be interesting to know what the median amount of withdrawal is from a traditional 401k, 403B, 457, or TSP in a year? I would imagine it is quite small due to size of the median retirement account. 🤔
Assuming early withdrawal of ira in california. I understand the federal tax plus penalty.
How would i calculate the tax with penalty first the state?
question: if you pull money from an acount and later in the year you unfortunately lose your spouse does that change your taxable rate? or only apply when you make the withdrawal? Great video BTW...most impressive knowledge
Don’t forget the potential impact of a large withdrawal on IRMAA. Seems like a hidden tax inside Social Security
Where do I report 1099-R Code U from my 401(K) in 1040?
I retired April 2022. The tax is 20% on my 401K withdrawals. Fidelity sells $2300 of stock funds and i receive $1840 into my checking account monthly. 2300 x .20 = 460. 2300 - 460 = 1840.
Withdrawal from traditional 401(k) subject to "placeholder" 20% federal tax. You may actually owe more or less than 20% and will be taxed further or receive a refund.
@@alrocky during my earning years I can claim say 4 exemptions for example on my W2 and then pay my tax in lump sums at the end of the year. Isn't there a similar option when 401K distributions are used as income. The IRS is saying that they are regular income so shouldn't I have the same options to manually set my exemptions on 401k distributions rather than the IRS forcing me to have a 20% withholding. Why in my retirement years am I suddenly not treated like an adult.
@@alrocky Any idea what the withholding from an annuity would be, which was bought from a pretax 401k? Will that be also subject to a placeholder 20% withholding during monthly payments? Thanks.
always good videos. keep going
Enjoyed the video. Is the sheet you are using for the tax figures available to share? I see the AARP link. Thank you
Thank you. If you're referring to the blue-ish sheet that looks like a Form 1040 and has the drop-down area, that is not publicly available as far as I know. That's part of one of my financial planning tools (Right Capital). I believe RC is only available for sale to financial advisors.
No tax in KY up to $31,000
NICE FOR THE INFORMATION FOR MICHIGAN I HAVE A MORTAGAE AND HAVE 1 1/2 YRS UNTIL I GET TO 591/2. NOW HOW MUCH WOULD IT BE ON 30 THOUSAND? I FILE WITH MY WIFE SELLS AVON NOT MUCH AT ALL MORE LIKE A HOBBY HOW DOES IT WORK AS FAR AS PAYING THE BANK OFF MY MORTAGAGE? DOES THE BANK WRITE OUT A CHECK TO THEM TO PAY IT OFF OR DO I HAVE TO DO IT MYSELF? DO THEY TELL ME WHAT THE TAX WILL BE AND GIVE ME A PAPER TO GIVE TO THE ACCOUNTANT THAT PREPAIRS IT FOR ME WHEN I GET MY W-2 FROM WORK?
I haven’t withdrawn any of mine yet but mine is going to be taxed at 12% when I do decide to make withdrawal.
Great video. Do you now where there is a 1040 form I can complete online that will calculate tax liability? The IRS website only has one for withholding from work. I want enter in planning numbers from my 401a/403b, social security, and brokerage account numbers to determine the mix that provides the lowest tax liability
You might find this one helpful for some rough estimates: www.dinkytown.net/java/1040-tax-calculator.html. It's not perfect, but it would let you enter withdrawals from your retirement plans plus Social Security (and other things) for an estimated tax liability. It also shows you how much of your Social Security is included in your taxable income, which is nice.
Thank you for the info!!
For me to know my 2023 tax is it as simple as knowing my taxable income and looking at the 2023 tax tables to figure out what my tax would be?? Thank you!!
That could be true for most people with simple returns. But there can always be wrinkles and complications. Tax credits are one example of that.
Thank you!
When using the rule of 55 can i withdraw any amount any time i need or does it need to be a fuxed periodic payments like 72T rule
You can withdraw any amount you want when using the so-called Rule of 55. As you noted, 72(t) has a more rigid schedule of payments.
For a retired person receiving income only from Social Security, a defined benefit pension plan, and a deferred tax 401k, might FICA tax be owed on any of that, and if so, which of those income types might be subject to FICA taxation? I believe the total FICA rate is 7.65 percent. So, for retirement planning purposes, this number is not insignificant.
Q1 none
No FICA on that type of income is due.
Thanks for the video. It was very informative. One question, when you withdraw from a Traditional 401k, are the gains taxed as "income tax" or are they taxed as a "capital gains" tax? It appears from the video that all of the 401k withdrawal (initial contributions, gains, dividends, etc) are taxed as "income tax".
Yes, withdrawals from a pre-tax 401(k) would generally be treated as ordinary income, which would typically lead to more income tax. Those withdrawals would not get (more favorable, in many cases) capital gains treatment. That's the case even if the earnings inside of the 401(k) result from dividends, interest, or capital gains. It generally all comes out as income if it went in pre-tax.
@@ApproachFinancialcorrect although it should be noted the IRS defines deferred income from 401s,IRAs, etc as ‘historical’ income and as such it does not initiate the clawback provision on Social Security amounts for early retirees.
if I'm taking a distribution per Rule of 55 and the 401k administrator still withholds the 10% penalty does the treasury treat that as an overpayment and return the 10% when I file taxes?
Any withholding would likely function as an "advance" tax payment. If you end up paying in more than you owe for the year, then yes, you should qualify for a refund. But to be sure, it's always best to check with a CPA or a tax expert who is familiar with the specifics of your tax return.
Excellent video. I notice you were using an app to project taxes. What app or website was this?
Thank you. The 1040 mockup is part of my financial planning tool (Right Capital). There's also a publicly-available free calculator that does similar things if you search for "Dinkytown 1040 calculator."
Hello so would I get penalized if i roll over my 401k into another 401k but take some in cash. I'm 59 will i have to pay taxes on the cash amount. Thank you
Whether or not you face penalties will depend if you're above age 59.5 or not. It sounds like you're close, and if you're over that age, you could avoid an early withdrawal penalty. If you're not yet there, you might or might not qualify for an exception to the penalty. If you're really close, it could make sense to wait, assuming that's feasible.
The money you move from one 401(k) to the other should not be subject to penalties as long as you do a direct rollover from one plan to the other. But any payments to you might trigger a penalty as well as 20% mandatory tax withholding (even if you later roll the money into a retirement account), so be careful about how you set things up.
Note that if you take some in cash, that amount would likely have the 20% mandatory tax withholding, so be sure to budget for that as you figure your amounts. And yes, you would often have to pay income tax on the amount you take in cash, assuming it was pre-tax money in the 401(k) plan. Deductions or tax credits on your return could reduce what you owe, but I can't say for sure without knowing the whole picture.
THX
How can you withdraw money while you are employed and over 60 years old and how much you can withdraw at one time.
There might be a few options to withdraw while you're still working. Loans and hardship withdrawals are potential options, but I'm guessing you're looking for more flexibility than those allow. In that case, you might ask if your employer offers "in-service distributions."
Whether or not that's allowed depends on your employer (each employer can set their own rules, to some degree). For example, you might be able to withdraw your entire vested balance, or only a portion.
Also, if you previously rolled money into your 401(k) (from a previous job's retirement plan, for example), that money might be available for withdrawal at any time.
Please keep in mind that there may be various limitations and tax consequences of taking a withdrawal. Please speak with your 401(k) plan's administrator for details, and review your plan with a tax expert before making any decisions.
@@ApproachFinancial thank you for your response
Thanks for the informative video. I think I have understood the tax implications on early withdrawal. However, I would appreciate second opinion on my following plan.
Lets assume I have $300K in 401K and I will stop working starting January 1, 2025 and I am 38 years old. I will leave my employer and I will not take another job.
If I withdraw $25K from 401K in January 2025 and have no other income in that financial year, I will owe no taxes to IRS because technically my taxable income would be zero after getting standard deduction of $27,700. Therefore, any amount deducted by IRS will be claimed by filing tax return in the following year. However, I will still be paying $2500 in penalties which is 10% of $25K. Am I correct?
And lastly, I can repeat this process every year until 80% of the 401K balance is withdrawn.
Your fiduciary will be required to withhold 20% Federal of that $25,000 but ,yes,unless you can qualify for one of the hardship withdrawals your assumption seems correct. Call the IRS and confirm though,you don’t want to get sideways with bureaucracy.
Is is worth to over pay Fed Taxes when making 401K withdrawal. Is there any tax benefit to doing this?
It can be worth it, but probably in limited cases. One example is when you have not withheld enough tax earlier in the year for irregular income sources. You're supposed to "pay as you go," and if you don't make sufficient withholding or quarterly estimated tax payments, you might owe tax penalties. But withholding can be treated by the IRS as having been received throughout the year, so it can make up for quarters when you under-withheld.
Of course, tax rules can be complicated, I may be misunderstanding or mistaken, the rules can change quickly, and there's potentially a lot of money at stake. Many other people may end up reading this. So, it's critical for everybody to triple-check their specific details with their tax expert before making any decisions.
Love your videos, but lemme ask you: since you say 401k is taxed like a job, then would THAT taxation contribute to social security as well? When we get taxed as a salary, they take out social security and medicare. FICA
No, you generally don't pay Social Security and Medicare tax on 401(k) and IRA distributions. To be more precise, let's say it's like income from a job-primarily for federal (and maybe state) income tax purposes. But other taxes may apply, depending on the situation.
This may differ from other types of income, like long-term capital gains, for example.
Because this can be complicated, I strongly suggest that anybody reading this consult with a tax expert who knows your specific details before making any decisions.
Quick question sir I have a 401k and have currently 9k on my 401k after I changed Employee so I'm a year into my job and i make around 60k a year if i withdraw my 401k how much will it effect my return I've gotten in the last 2 years 5k would that hurt to take out ?
Good question, and I can't say for sure without all the details. It sounds like the growth, at least, might potentially be taxable (that's 5k if I'm understanding correctly). And if you were making pre-tax contributions or getting those contributions from your employer, the entire amount could be treated as income. You could search online for the Dinkytown 1040 calculator and put in your information to get some rough estimates for the amount of additional tax involved, or ask a tax preparer what happens if you add another $9k of income on top of your 60k.
If the money was in Roth 401k, the impact might be lessened. But again, I don't have enough knowledge of the situation to know for certain.
will I get a tax refund if I'm on SS and have a small withdrawal from my 401k to live on making less total 25.5k...?
More information would be needed married vs single total amount of AGI etc. are needed to answer this question.
So if I have a balance of 50k in my 401k, but 20k of that comes from capital gains, and 30k was my contributions. If I want to liquidate my entire 401k balance of 50k - would my taxable income increase by 50k?
Do I not have to pay capital gains tax for the 20k of capital gains that I accrued while holding the 401k? Would my taxable income just increase by 50k with no consideration of capital gains tax?
Assuming it's a pre-tax 401(k)-which might not be accurate-the whole 50k would typically be treated as ordinary income if you cash out the entire account. So yes, I would expect your taxable income to increase by roughly 50k in that case. Capital gains generally do not apply when you're taking a distribution from a retirement account like a 401(k) or IRA. Instead, capital gains taxes typically apply in taxable accounts like individual and joint accounts.
If you have money in Roth 401(k) or after-tax 401(k) accounts, things may be different.
Tax on everything
1:11 Clarify. Are you saying Roth 401k withdraws are taxable? 😳
In some cases, it's possible for the earnings portion of Roth 401(k) to be taxable. That would only happen when a distribution is not a "qualified" distribution. In very general terms, that would be after the 5-year period, plus age 59.5 or death/disability.
Some plans also allow after-tax (non-Roth) contributions. Any earnings on those would typically be taxable, although you might be able to convert to Roth.
As always, anybody reading this should check with their tax professional before making any decisions, taking a distribution, or filing a return. These comments may be incomplete, contain inaccuracies, be out of date, or not apply to your situation.
I made a withdraw of a 100k from my 401k and my salary for 2023 is 70k.
Total income $170k
My contributions to 401k is 10% and if my standar deducción filing joint return is $27,700
My wife has no income my question is how much taxes I have to pay for 2023 income tax year.
I'm 66yrs old and paid 20% federal and 2% state taxes on my 100k witdrawal.
Will this affect my IRMAA if I retire in 2yrs from now and how much taxes I have to pay for 2023 income tax year.
Answer please!!!
I decided to make a video that answers the question. Hopefully this tells you everything you wanted to know: th-cam.com/video/miejD46HZOM/w-d-xo.html
I’m not Looking for houses
If I retire @ 65 and want to close my 401 what will they tax it @
I'm 68 and live in California. My 401k plan provider told me to expect around 20% to be with held for taxes. But when you file your taxes, you may get some of that money back depending on your tax situation.
You want to withdraw entire 401(k) balance into cash or roll it to traditional IRA and withdraw portion each year?
What is the website link to the interactive 1040 with the withdraw 25k, 50k, etc.
There is not a public link available for that, unfortunately. That's from a financial planning tool I use with clients (Right Capital), and I created a hypothetical client for that example.
👍👍
Bare with me, i'm trying to understand.
So, I will basically be taxed twice?
1) During the actual withdrawal I will pay fed and state taxes plus the fee.
2) Then, again I will owe at the end of the year once I file my taxes?
Step #1 in your list is just withholding-an estimate (or "advance") on taxes you might owe. You'll only owe more (Step #2) if you didn't withhold enough in Step 1.
In some cases, the amount withheld in Step 1 turns out to be too much, so you get a refund when you eventually file your taxes. Alternatively, it might be too little (so you owe more) or exactly the right amount. But you can't know for sure until you complete your tax return.
It may also depend on how much you withhold from other sources, like a job that pays W2 wages and withholds taxes for you.
It should be tax free
Pay what you owe. Period.