401K Tax Laws

[hooknows]

What is the name of your state? VA

Can anyone recommend a good resource for 401K tax laws? Specifically, I am interested in learning more about the taxation of 401K distributions after retirement. The way I understand it, if someone retires in 2004 and takes a distribution from their 401K the same year, they will be taxed at their current tax rate. However, if that same person waits until 2005 to take a disitribution from the 401K, they will be taxed at a lower income tax bracket because they are retired and techincally without any real income. Do I have this correct?

Thanks in advance!

 

[BleedingHeart]

Hi from Minnesota
This depends on how much your retirement income is. You are aware that
401 K's, Social Security, Pension and other income IS taxable. So is Deferred Comp. and Disability. The percentage rates may be different because of other
deductions which would lower your taxable income like spouse, mortgage interest etc. The lower rate you speak of may be because your total
income will be less than your Gross income was while you were working. None
of your deductions while working were taxed, therefore, they will be considered "Real" income when you retire. To be on the safe side you may want to discuss your entire retirement package with an Income Tax person before you make application to set up the payments. You can also get information by calling your 401K office representative and ask if they have
info. they can send you, Otherwise you can look it up here.
http://www.financialdirectory.ws/Asset_Management/Retirement_Plans/401k/default.aspx
There is a guide here that you can order for free about what you should know about 401k's before you retire. Good Luck in your Retirement ~Mary~

 

[cbg]

In essence you are correct, but as Mary says, there are variables depending on your specific circumstances and the terms of your plan document. Before making any final decisions, consult with a tax advisor, and don't take a distribution before you actually have to.

 

[vrzirn]

California
If you do not wish to sell any equities in the 401k you may roll them over into a taxable account and pay the tax due on the roll over out of pocket or sell some dogs in the taxable account to raise the money.
But as advised, talk to an expert first.

 

[DrewfromCA]

Man, you guys are throwing out all sorts of superfluous information to this guy...

The simple answer is this... 401k withdrawals are taxed at ordinary income rates, which means that any distribution amounts from the 401k are added to any other ordinary income you have. Ordinary income would be salary, wages, interest on bank accounts, short term capital gains, etc.

So, say you made $0 for 2004, had $0 in interest or any other income. If you took a 401k distribution of $10k, you would have taxable income of $10k, but since the amount is so small, there wouldn't be much in the way of taxes. (Since you have the standard deduction and personal exemptions)

So basically, the distribution amounts are just added to whatever else you received during the year(ordinary income).

p.s.- There are other taxable items like qualified dividends and long term capital gains that are capped at a certain rate, but we won't get in to those.
Consult your tax advisor for more info...