401 k withdrawals

Discussion in 'Professional Trading' started by babe714, Nov 1, 2002.

  1. babe714


    Can you withdraw money from a 401 k without paying income tax on it . I'm being told that after your 65 you can take 14,000 or less out every year and pay no income tax on it , because your allowed to make that much a year when your retired.
  2. I think that you will find that 401K distributions during retirement just flow into your adjusted gross income. So, its not that the 401K money is "tax free" as much as it is that you may be in a very low tax bracket after retirement.

    Before retirement, I think you run into some nasty penalties for early withdrawal (although the IRS might have some exception clauses if you are using the money for particular purposes). Also, you may be able to "borrow" from you 401k (but not a 401k rollover). Your company will have the details on IF their 401k plan allows for borrowing.

    Best wishes to you on your taxing issue,
  3. ddefina


    They are probably assuming you have no other income and are using your standard deduction plus personal exemptions? Otherwise nothings tax free unless you have 100% basis in it.
  4. Isnt it wonderful...Accountant A says yes, Accountant B will say no, Accountant C will refer you to Accoutant A
  5. ddefina


    They did a test of 50 accountants in some magazine a few years ago, and only 2 out of 50 agreed on the solution to the given test problem. Accounting/Auditing is a game of probability. You have a 1 in 200 chance of being called to task for what you do (audit), so just do your best. The IRS is less knowledgeable than the accountants, so it gets scarier if you include them.
  6. Accountants, lawyers and consultants are the experts.

    I am just not sure what they are experts in ...
  7. babe714


    I know a guy who gifted money away each year to get into a lower tax bracket after retirement to get into a zero tax bracket. then did'nt have to pay taxes on 401k withdrawals . He gave it to his grandkids 9k each . Any comments? sounds illegal.
  8. Leviathan


    The "tax savings" of a deferal is forced into the plan. When you borrow these dollars out they must be repaid with after tax dollars. You have then "requalified" those dollars without having either initial deferral or deduction.

    Then at retirement those same dollars and every dollar of growth is then taxed again upon withdrawing for income.

    I'd pass on 401(k) loans. Try a mortgage against the home with the 401(k) amortised to meet the mortgage payment.
  9. trdrmac


    Gifting to grandkids or anyone for that matter is tax-free up to 11K per year per person for both the donor and the recipient.
    However, this type of gifting has no impact on one's tax bracket. Unless of course the gifts are made to a qualified charity, and then I think the limit is 50% of your taxable income.

    What this type of gifting will do though is reduce your taxable estate upon death. So someone with an estate over 1M or 2M for a couple is better off gifting to heirs prior to death to minimize the estate tax.

  10. trdrmac


    Earlier this year I ran a sample return on another thread using Kiplinger Software. There was quite a difference between the ending tax bill and initial tax bill. And all of this is based on plugging information where it appears to be most correct.

    So it does pay to check behind your accountant and/or software.

    Kiplinger Software Review

    Ok, I finished the test return for our friend Trader Joe on Kiplinger's Tax Cut. I used 80,000 as the short term income on 4797, 10,000 of Schedule C business expenses and 2000 in Health insurance premiums.

    Results of the test were not too good if you are not prepared to do some plugging of numbers. And if you don't understand the tax laws it would cost you some money.

    Here is what happened. The $10,000 of business expenses flowed to the 1040 as a LOSS. The $80,000 of short term trades from 4797 also flowed to the 1040. The total income was reported correctly but this poses a problem. Because the business income is a negative (10K), the $2000 Health Insurance Premium of which 60% could have been deducted from income was disallowed. The end result was income was overstated and tax due was overstated. Total Tax Due $16788

    Next I dropped the $80000 from the 4797 on to Schedule C to make the business income correct. Since the system still carries the $80k to 1040 I had to override the system and plug in a 0. At this point the income of $70,000 was correct. But this presented a second problem in that the system calculated Self Employment Tax from the Schedule C income. As short them capital gains are not subject to SE Tax, this overstated the Tax Liability. Total Tax Due $22027

    OK to get the return as close as I could I left the above return with the 4797 flowing to the Schedule C as business income. On form 1040 I plugged LINE 27 with a 0 (this is the deduction for 1/2 of SE tax) I also plugged LINE 53 with a 0 (this is the SE Tax itself). This allowed the additional deduction of $1200 for the health insurance premiums paid. This brings our tax liability to $13497.
    #10     Nov 3, 2002