The IRS allowed for pre-tax personal contributions. They also allowed the gains to grow tax deferred for years. There comes a point when the IRS stops being so generous and wants their tax. This happens when you start to take a distribution from the plan. You in effect become your own paymaster – meaning you can determine the amount of the distribution. If your 401 k contributions were traditional personal deferrals the answer is yes you will pay income tax on your withdrawals. If you take withdrawals before reaching the age of 59 ½, the IRS may also impose a ten percent penalty.
If you don’t take any distributions and reach the age of 70 ½ , the IRS will step in and force you to take a distribution. They are called Required Minimum Distributions (RMD’s). The IRS’s rationale is “hey time to pay up – you aren’t getting any younger”. The IRS has a schedule and they will tell you how much your minimum distribution will be. This distribution of course will be considered income and will add to your other income for the affected year.
Assuming your 401 k is traditional and not ROTH, a distribution will be taxed as income. This distribution will be added to your other income for the year and may or may not push you into a higher tax bracket. It would be prudent to seek a tax professional and do some tax planning.
If you would like further information, please visit www.sdretirementplans.com or call us at 866 639 0066.