401k withdrawal and tax withholding

Forum|Forum|1 year ago
April 27, 2024
2 replies
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I'm 62 years old, semi-retired, and planning to withdraw $2,500 from my 401k every month. When I checked it, I have to pay about $693 in estimated taxes (federal 20%, state 7.75%), so my net would be around $1,806.

So, this is my question: is it mandatory for my investment company to withhold this taxable amount when I withdraw it, or can I withhold the taxes until I file the tax returns next year?

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Best answer by VolvoGirl

I still don't get it clearly.

Let me put it this way:

1. 401k withdrawal amount: $15,000 ($2500x6, June-Dec. 2024)

2. Federal/state taxes due: $638 per each $2500 withdrawal, so the total is $3,828

If I choose to pay the taxes now, I would receive $1,862 each month after the tax.

If I choose to withhold the taxes until next year, I would receive $2,500 each month before tax.

Okay, let's say my taxable income for next year is $30,000, other than this 401k. So, my total taxable income is $45,000($30,000 plus $15,000), right?

Now, this is my question. During the tax return next year, should I pay the taxes on my taxable income of $45,000? Or should I pay $3,828 (401k withheld tax), in addition to the taxes on $45,000? I'm confused here.

You will pay 1 tax on all your income 45,000. The tax is figured on your tax return you file. The $638 taxes taken out of the 401K withdrawals are not the actual tax. Just withholding towards the tax. You will get credit for the withholding on your tax return.

You aren't actually paying the tax when you take the 401k withdrawals. You have taxes withheld like from your paycheck. You still have to enter the whole gross amount 15,000 (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 5a and the taxable amount on 5b. The withholding will show up on 1040 line 25b.

Hal_Al

Employee

You can wait and pay the taxes when you file the tax returns next year. You can do this since the amount you will owe is less than $1000 (federal). You should check what your state's limit is ($500 is typical).

dmertz

Employee

The law requires that the 401(k) plan withhold a minimum of 20% for federal income taxes because your distributions are eligible for rollover. Whether or not state income tax withholding is mandatory depends on the state. The 7.75% figure suggests mandatory Maryland tax withholding.

Underpayment of taxes is figured on a quarterly basis, so waiting until filing to pay your entire tax liability will generally result in underpayment penalties.

cspyonAuthor

Hmm...

So this is what I want to know. If I withdraw 401k, it counts as my income, right?

For example, assuming withholding the due taxes, if I withdraw a total of $15000 ($2500 x 6) until Dec., does it simply add to my other income and get taxed when I file the tax returns next year? Or do I pay for the taxes on this 401k withdrawal and, seperately, on my total incomes including the 401k withdrawal?

NCPERSON1

you ONLY calculate tax on a tax return.

What is withheld from the 401(k) withdrawals are "withholdings", which is simply the down payment against the actual tax calculated on a tax return.

to answer your specific question, the $15,000 of withdrawals are added to you other income on the tax return, the tax is calculated and then the withholdings are deducted from the tax. The result is either you get a refund or owe more.