After you retire, distributions from 401(k) plans are taxed as ordinary income.
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Unless you roll over all or part of the distributions you receive from your 401(k) plan to a traditional individual retirement account or other qualified pretax retirement plan, the payments are taxable. The good news is you do not pay federal income tax on contributions you make to a regular 401(k) plan until you begin withdrawing from the plan. When the time comes, the plan administrator can make the distributions in lump sums or in the form of annuity or installment payments.
Contributions to the Plan
A 401(k) plan has a required beginning date when you must begin receiving minimum distributions from the account. Under Internal Revenue Service guidelines, the required beginning date is April 1 of the first calendar year after you reach age 70½ or after the year in which you retire, whichever occurs later. Some 401(k) plans require you to begin receiving distributions at age 70½ even if you haven’t yet retired. Even though your distributions are taxed, you can choose optional methods for figuring the tax on lump sum distributions. If the distributions from your 401(k)
are eligible for rollover to another qualified retirement plan, you must transfer the distribution within 60 days of receiving it. Although the money you roll over into another retirement account is not taxable, you must report the income on Form 1099-R.
You must pay taxes on any distributions you receive from your 401(k) plan that you do not roll over to another qualified retirement plan. It doesn't matter whether the withdrawals from your 401(k) plan are periodic or a lump sum. Distributions from the account are taxed as ordinary income in the year in which you receive them. No taxes are withheld from your 401(k) plan if you transfer your distributions directly to an individual retirement account or other qualified plan. If you don't roll over the money to another retirement plan, any taxable portion of a distribution you receive will have 20 percent withheld for taxes. The same applies even if you plan to roll it over to another plan later on. If you receive an early distribution from the plan before you reach age 59½, the taxable portion of the distribution that you do not roll over is subject to an additional 10 percent early withdrawal penalty tax.
Retirement Savings Contribution Credit