Question

What are the taxes on a 401(k) distribution?

Answer

The answer here depends on your situation and reason for taking a distribution. Whether you’re moving money to a new retirement plan, taking money out for retirement, or making a withdrawal to pay expenses, you’ll want to understand the tax implications of your 401(k) distribution. 

401K distribution tax

Moving the money to a new plan, such as an IRA or a new employer 401(k) is known as a rollover. This type of move can be taxable if the money is sent to you versus the financial institution. 

  • If you’re moving your retirement savings funds to a new plan through a direct rollover, no tax reporting is necessary.
  • If your plan is sending you the money first (an indirect rollover), there’s more to the story.

Find out more about both direct and indirect rollovers in our 401(k) rollover to IRA article.

What if you’re not rolling over your 401(k) and it is simply time to use the funds? Read on and we’ll outline everything else you need to know about taxes on a 401(k) distribution.

401(k) distribution tax form

When you take a distribution from your 401(k), your retirement plan will send you a Form 1099-R. This tax form shows how much you withdrew overall and the 20% in federal taxes withheld from the distribution. This tax form for 401(k) distribution is sent when you’ve made a distribution of $10 or more.

Retirement plans are designed so that you can use the money when you reach retirement. For this reason, rules restrict you from taking distributions before age 59½. You can take money out before you reach that age. However, that generally means you’ll have a 10% additional tax penalty unless you meet one of the exceptions such as taking a 401(k) withdrawal due to coronavirus impacts.

If you’re taking out funds from your retirement account prior to 59½  (and the coronavirus exception or other exceptions don’t apply), use IRS Form 5329 to report the amount of 10% additional tax you owe on an early distribution or to claim an exception to the 10% additional tax.

Find additional exceptions in the Form 5329 Instructions.

How does a 401(k) withdrawal affect your tax return?

Once you start withdrawing from your 401(k) or traditional IRA, your withdrawals are taxed as ordinary income. You’ll report the taxable part of your distribution directly on your Form 1040.

Keep in mind, the tax considerations for a Roth 401(k) or Roth IRA are different. To find see the difference side-by-side, check out this table from the IRS.

Do you pay taxes twice on 401(k) withdrawals?

We see this question on occasion and understand why it may seem this way. But, no, you don’t pay taxes twice on 401(k) withdrawals. With the 20% withholding on your distribution, you’re essentially paying part of your taxes upfront.

Depending on your tax situation, the amount withheld might not be enough to cover your full tax liability. In that case, you’ll have to pay the rest of the tax when you file your return.

If the opposite is true and you’ve paid more than you owe, you’ll get a little back at tax time. Either way, you would not pay the same tax twice on your 401(k) withdrawal.

Need more help with 401(k) distribution taxes or other retirement account questions?

Tax laws for retirement savings accounts can get complicated. Don’t try to navigate complicated tax code yourself. Get help! Whether you use a tax pro at one of our H&R Block office locations or file online, we can help you maximize your tax savings.

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