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winktax
winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience:  18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
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401k tax rate after 59.5 years

Customer Question

What is the tax percentage on a 401K withdrawal after age 591/2 if I use the money to pay off my mortgage?

Submitted: 2 years ago.
Category: Tax
Expert:  winktax replied 2 years ago.

A 401k withdrawal after age 59.5 will be taxed at ordinary income tax rates and will not be subject to the 10% early withdrawal penalty. The portion withdrawn from the 401k will be taxable and would be added to your other taxable income to figure the tax rate.

What the money is used for would not effect the income tax rate, ie. there is no direct benefit for paying off the mortgage in relation to the 401k withdrawal.

Tax rates for a single tax payer are: taxable income - $0 to $8,500 = 10%, $8,501 to $34,500 = 15%, $34,501 to 83,600 = 25%, $83,601 to $174,400 = 28%.

Note, when money is withdrawn from a 401k, the 401k plan administrator is required to withhold 20% for federal taxes. You may or may not owe 20% on the withdrawal. Rolling the funds over to an IRA and then taking a withdrawal from the IRA removes this requirement, you can choose the amount to be withheld from an IRA withdrawal.

Customer :
What is the tax rate for married taxable income over $250K?

Rolling the funds over to an IRA and then taking a withdrawal from the IRA removes this requirement, you can choose the amount to be withheld from an IRA withdrawal.

winktax :
Married Joint - $0 to $17,000 = 10%, $17,001 to 69,000 = 15%, $69,001 to 139,350 = 25%, $139,351 to $212,300 = 28% and $212,300 to 379,150 = 33%

Customer :
Rolling the funds over to an IRA and then taking a withdrawal from the IRA removes this requirement, you can choose the amount to be withheld from an IRA withdrawal. So if I do a roll over of my 401K instead of a cash disbursement from my 401K and roll it into an IRA. I can then withdraw those funds from the IRA without paying the tax or penalty?

winktax :
You are over age 59.5. No penalty regardless of where you take out the money. Any funds taken out of the 401k or IRA would be subject to income tax. An 401k must withhold 20% from a distribution. An IRA can do NO withholding. Just a suggestion that with an IRA you can choose to have no tax withheld or a more accurate amount of tax withheld (when factoring in your whole tax situation for year, you may not need to have 20% withheld and sent to the IRS).

Customer :
OK clear enough, this should answer my questions. Thank you

winktax, Enrolled Agent
Category: Tax
Satisfied Customers: 425
Experience: 18 years experience as an Enrolled Agent, insurance agent, stock broker and financial advisor.
winktax and 5 other Tax Specialists are ready to help you
Customer: replied 2 years ago.

If someone does not take a withdrawal on their 401K until normal retirement age say 66 and at that age begins taking incremental withdrawals does what is the tax rate for these withdrawals if any?

Expert:  winktax replied 2 years ago.
The tax rate on 401k/IRA withdrawals are ordinary tax rates, what ever your marginal (average) tax rate is for the year of withdrawal. The normal retirement age for 401k/IRA is any age after 59.5. The next date specific age is 70.5 when one must begin withdrawals based on a minimum amount based on life expectancy each year.

The original theory on 401k/IRA withdrawals was that one would be in a lower tax bracket during retirement therefore paying tax at that time would be less. With Social security now taxable this is not always the case, but in many cases is.
Customer: replied 2 years ago.
thanks again

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