Do I Have To Claim My 401K Withdrawals On My Taxes?
One of the most common forms of saving for retirement is to utilize a 401k. A 401k is advantageous for people because they have the ability to save for retirement on a tax deferred basis. While they do not have to pay taxes upfront on their deposits, those using a 401k will have to pay a tax when they eventually withdraw. How you are taxed depends on several scenarios.
Over 59 Years Old
Those people who withdraw money from their 401k and are older than 59 years old will have to pay taxes on their withdrawals. For those over 59 and a half, they will be taxed at their marginal tax rate. Since many retired people do not have another source of income, other than social security, the marginal tax rate could be quite low.
Those people who withdraw money from their 401k and are under 59 years old will also have to pay taxes. For people under 59, the tax liability will be based off of their maximum tax rate. So for someone who is in the 30% tax bracket, a $10,000 withdrawal will result in $3,000 worth of taxes. Furthermore, they will have to pay a 10% early withdrawal penalty, which will cost another $1,000.
Taking Out A Loan
Those people who withdraw money in the form of a loan will not have to pay taxes on the withdrawal. However, a person will have to stick to the repayment schedule. If they default on the loan, the unpaid balance will be treated as a withdrawal on their taxes and they will also have to pay a fee if they are under 59 years old.