Withdrawing money from 401(k) will be taxed – How to avoid it

Withdrawing money from 401(k) is taxable in differentscenarios. Hopefully, you are saving money in your 401(k) account no matter youare approaching retirement age or not. People normally take 401(k) as a primarysource of income for retirement life regardless of Social Security deposits.

But you must have a proper understanding of 401(k) accountsworking before studying about the taxation on withdrawals. This information isimportant to know if you are planning to make the money last up to the lengthof your retirement.

How 401(k) Investments affect your tax calculations

There is upfront tax saving with powerful 401(k) account. The entireamount which you contribute to a 401(k)account is deducted from your income before tax. This, in turn, lowers your taxableincome and sometimes tax brackets also.

However, withdrawing money from 401(k) will be taxed verydifferently than contributions. As you start withdrawing money from 401(k),your withdrawals will be considered as taxable income likewise any ordinaryrevenue. Moreover, your withdrawals will be taxable at the same tax bracket asother income sources in line with W-2 employment.

Therefore, while deciding on the amount to withdraw from401(k) account you must consider tax bracket. Because the higher the amount thehigher will be the tax bracket so keep all things in focus while deciding yourstandard of living.

What will be the rate of tax on total income?

The rate of tax on 401(k) withdrawals depends on youroverall income. According to the new tax plan, we have seven tax brackets – said by atax expert Robert at a well-reputed firm.If you withdraw $25,000 from 401k then you may fall under a tax bracket of 12%and the final amount you get of coursewill be lower than $25,000 after deductions.

Tax Brackets 2018 for 401(k) Withdrawals

Tax rate Single Filers Married filing jointly or qualifying widow/widower Married filing separately Head of household
Tax rate: 10% Single filers: Up to $9K Married filing jointly or qualifying widow/widower: Up to $18K Married filing separately: Up to $9K Head of household: Up to $13K
Tax rate: 15% Single filers: $9K to $37K Married filing jointly or qualifying widow/widower: $18K to $75K Married filing separately: $9K  to $37K Head of household: $13K to $50K
Tax rate: 25% Single filers: $37K to $91K Married filing jointly or qualifying widow/widower: $75K to $153K Married filing separately: $37K to $76K Head of household: $50K to $131K
Tax rate: 28% Single filers: $91K to $191K Married filing jointly or qualifying widow/widower: $153K to $233K Married filing separately: $76K tp $116K Head of household: $131K to $212K
Tax rate: 33% Single filers: $191K to $416K Married filing jointly or qualifying widow/widower: $233K to $416K Married filing separately: $116K to $208K Head of household: $212K to $416K
Tax rate: 35% Single filers: $416K to $418K Married filing jointly or qualifying widow/widower: $416K to $470K Married filing separately: $208K to $235K Head of household: $416K to $444K
Tax rate: 39.6% Single filers: $418K or more Married filing jointly or qualifying widow/widower: $470K or more Married filing separately: $235K or more Head of household: $444K or more

How Early Withdrawals can affect your Tax

IRS takes all the withdrawals as ‘early withdrawals’ whichyou cash out from a retirement planbefore your age hit 59.5 years. Most of the time in such scenario you have topay an extra 10% tax on withdrawals on top of your tax bracket untilunless you qualify for an exemption.

Likewise, if youlose/quit your job then you either opt for 401(k) conversion to IndividualRetirement Account (IRA) or cash out. If you select cash-out then it willqualify for Early Withdrawal, this amount will get an extra 10% rate. Furthermore, this tax will eat-up your savings onthe other side you will lose the foreseeable interest and market growth oninvestment.

If possible always skip ‘Early Withdrawal’ and let your money grow in your 401(k) account until your retirement age.



Says Corby – A 401(k) advisor

Manage your 401(k) to last until your Retirement

You must know that each month you owe a certain amount of tax on your income. Whileplanning for retirement accounts,  it isimportant to keep in mind that all such savings will help to keep your taxlower. Therefore it is a good idea tosave aggressively in present to avoid huge taxes and to live a good life afterretirement. Saving on tax with 401(k) investments can be a motivator for some.

If your retirement is somewhat close you must go through last-minuteretirement plan strategies which can help a lot to get you back on trackbefore it’s too late.