401k Plans

• A 401k plan is an employer-provided retirement account that employees can transfer part of their wages to on a regular basis. The Internal Revenue Service (IRS) defers the income tax on these contributions, meaning that 401k plan participants do not pay taxes on their retirement funds until they withdraw them. Most 401k plans have conditions that participants must meet before they can withdraw their funds.
  
  

401k Distributions

• Employees who reach the age of 59 1/2 are generally able to withdraw their 401k contributions and interest without incurring a penalty. Those who make withdrawals from one 401k plan and transfer the funds to another plan within 60 days may be eligible for a direct rollover. These transactions are common when a taxpayer changes employment and enrolls in a different retirement account. Rollovers are not subject to income tax or a penalty. However, those who withdraw their 401k plan funds before reaching the age of 59 1/2 or without meeting any hardship circumstances outlined by the plan must pay a 10 percent penalty on their distributions.
  
  

Tax Treatment of Retirement Plan Withdrawals

• Since 401k funds are taxed at the time of distribution rather than the time of contribution, all 401k plan distributions are subject to federal income tax. Taxpayers should report these withdrawals on their federal income tax returns. Early distributions are subject to both income tax and the additional 10 percent penalty.
  
  

Reporting 401k Distributions

• Taxpayers who withdraw 401k funds receive 1099-R forms at the end of the year, noting the amount of their distributions and the amount of the funds that are subject to tax. These statements also show a code for each transaction, explaining if the withdrawal was a regular distribution, a direct rollover or an early distribution. Taxpayers should report their 401k distributions on line 16a of form 1040. If there is excess income tax or a penalty due, individuals should note this amount on line 58 of the form. Those who owe back income tax as well as the additional penalty may have to complete form 5329 "Additional Taxes on Qualified Plans."