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Retired at age 66 cashed out our 401k from employer plan, 226,000.00, can we spread out the tax over time?

Forum|Forum|7 years ago
June 5, 2019
7 replies
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We want to reinvest our 401k employer plan to stocks. do we pay tax on the profit or not? Can we spread out tax over time?

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Best answer by Opus 17

Withdrawals from 401(k) plans are taxed as ordinary income. This will put you in the 28 or maybe 33% tax bracket. There is no income averaging rule that would allow you to spread the tax out over time. Because the money was deposited pretax, you owe tax on the entire withdrawal – original contributions and gains.

If it has been less than 60 days, then put the entire amount into a rollover IRA, or put it back in the 401(k). Do this instantly. Then, take your time to understand your options. You can leave the money in the 401(k), or you can invest in an IRA, or you can withdraw it. IRAs allow many more flexible investment options, and you would only pay tax when you withdrew it from the IRA. You could roll the money over into a traditional IRA, and not pay taxes until you withdraw it to spend it, or you can roll the money over into a Roth IRA, and pay the income tax, but then you get the benefit of tax-free growth from now on. If you keep the money as cash, and invest it with a stockbroker, not only will you owe income tax on the entire withdrawal now, you will also income tax every year on the capital gains in your stock brokerage account.

But if it has been more than 60 days, you're going to get hit with a huge tax bill and there is nothing you can do about it.

X

xmasbaby0

Employee

How long ago did you do this?

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

fanfare

Employee

Once you cash out, all your options collapse, like the Shroedinger wave equation.

X

xmasbaby0

Employee

@dmertz Help!!!!!!!

**Disclaimer: Every effort has been made to offer the most correct information possible. The poster disclaims any legal responsibility for the accuracy of the information that is contained in this post.**

VolvoGirl

Employee

Probably a bad move. You should have rolled it over to a IRA if you didn't like the employer's plan options. Or did you roll it over?

S

SweetieJean

Employee

As asked above, when exactly did you do this?

VolvoGirl

Employee

If you just did it recently you have 60 days to put it in an IRA. You will have to replace any withholding taken out from you own money so 100% gets rolled over. Or the withholding will become a taxable distribution.

O

Opus 17Answer

Employee

Withdrawals from 401(k) plans are taxed as ordinary income. This will put you in the 28 or maybe 33% tax bracket. There is no income averaging rule that would allow you to spread the tax out over time. Because the money was deposited pretax, you owe tax on the entire withdrawal – original contributions and gains.

If it has been less than 60 days, then put the entire amount into a rollover IRA, or put it back in the 401(k). Do this instantly. Then, take your time to understand your options. You can leave the money in the 401(k), or you can invest in an IRA, or you can withdraw it. IRAs allow many more flexible investment options, and you would only pay tax when you withdrew it from the IRA. You could roll the money over into a traditional IRA, and not pay taxes until you withdraw it to spend it, or you can roll the money over into a Roth IRA, and pay the income tax, but then you get the benefit of tax-free growth from now on. If you keep the money as cash, and invest it with a stockbroker, not only will you owe income tax on the entire withdrawal now, you will also income tax every year on the capital gains in your stock brokerage account.

But if it has been more than 60 days, you're going to get hit with a huge tax bill and there is nothing you can do about it.

S

SweetieJean

Employee

You may also be assessed underpayment of estimated tax penalties, interest, etc. by the IRS.
Also remember your State taxes. It's a shame you didn't seek out financial advice before doing this. One of my family members cashed in 401(k) (against professional advice) to buy a house, and has regretted it ever since.