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i just opened a 401k in oct and have a retirement plan. do these count as ‘taxable interest income?’ help!
By Tom Dunn | December 25, 2008
usijana_senka asked:
i am trying to file 2007 taxes and i don’t think that 401k’s and retirement plans are taxable but i tried using some tax calculators and they were asking me if i had a 401k etc so i got confused. this is the first year that i have a 401k…
Chris
i am trying to file 2007 taxes and i don’t think that 401k’s and retirement plans are taxable but i tried using some tax calculators and they were asking me if i had a 401k etc so i got confused. this is the first year that i have a 401k…
Chris
Topics: retirement planning |
December 25th, 2008 at 8:59 pm
No they don’t, unless you took some out before I think it is age 59 and 1/2. It is tax free until you withdrawl it.
December 27th, 2008 at 4:07 pm
No, the 401K contribution (within allowed limit) and income earned in the account is taxable “deferred”. The tax software ask about that for the sake of guiding you through the tax preparation process, and I am sure it will exclude the 401K portion from your tax return.
BTW, tax is a sure thing so IRS will come to you for tax against your 401K sooner or later. What “deferred” means is that IRS will not tax you until you start to distribute $$$ from your 401K account.
December 30th, 2008 at 5:18 am
The reason your “tax calculators” asked about your 401k and other retirement account contributions is because you may qualify for a retirement contribution CREDIT, which will lower your overall tax burden.
If you make any early withdrawals, aka distributions, from your 401k/IRA and don’t roll that amount over into another qualifying retirement account within 60 days (I believe that’s the max time period), you’ll have to pay a ‘penalty’ tax of 10% on that withdrawal/distribution.
December 31st, 2008 at 7:05 pm
You do not have to pay taxes on your 401(k) so long as you did not withdraw. But, if you are under age 59 1/2 chronologically, you will be assessed 10% of your income tax liability. It will be added to the income tax you owe. There are a very few exceptions wherewith the taxpayer doesn’t get penalized if under age 59 1/2:
There are several exceptions to the age 59½ rule. Even if you receive a distribution before you are age 59½, you may not have to pay the 10% additional tax if you are in one of the following situations.
You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
The distributions are not more than the cost of your medical insurance.
You are disabled.
You are the beneficiary of a deceased IRA owner.
You are receiving distributions in the form of an annuity.
The distributions are not more than your qualified higher education expenses.
You use the distributions to buy, build, or rebuild a first home.
The distribution is due to an IRS levy of the qualified plan.
The distribution is a qualified reservist distribution
The confusion may be because the software was probably asking you to figure modified adjusted gross income {MAGI}. IRS instructions: You can use Worksheet 1-1 to figure your modified AGI. If you made contributions to your IRA for 2007 and received a distribution from your IRA in 2007, see Both contributions for 2007 and distributions in 2007, later.
Do not assume that your modified AGI is the same as your compensation. Your modified AGI may include income in addition to your compensation such as interest, dividends, and income from IRA distributions.
Form 1040. If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts.
IRA deduction.
Student loan interest deduction.
Tuition and fees deduction.
Domestic production activities deduction.
Foreign earned income exclusion.
Foreign housing exclusion or deduction.
Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989 (For Filers With Qualified Higher Education Expenses).
Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses.
This is your modified AGI. Source: IRS
There is a chance the software asked if you invested in a traditional IRA. While there are nondeductible monies and deductible monies you can put in to a traditional IRA, generally the IRA is deductible “above the line” so long as you did not contribute too much. That is
1} over 4000 or your “taxable compensation limit, whichever is less {please note, The taxable compensation limit, applies whether your contributions are deductible or nondeductible}
or
2} over 5000 if you have attained your 50th birthday. If you contributed too much, you have until April 15 to withdraw your “excess contribution”. Then you will not have to pay 6% excise tax.
January 3rd, 2009 at 1:47 am
The earnings inside your 401k are not taxed until they are withdrawn.
However, enter your 401k information into your return. The IRS tracks this information. It appears on your W-2 and affects your eligibility for other credits and deductions.