General Question

Skaggfacemutt's avatar

Can you get your money out of a 401K without paying taxes on it?

Asked by Skaggfacemutt (9068 points ) March 4th, 2010

So I am putting money in my 401K as a tax shelter. My plan is to take $5,000 out each year after I retire, and put it in a CD at my bank. If I take out less each year than a single person’s tax exemption (approx. $5,000) and have no other taxable income (only Social Security and a pension), then I won’t have to pay taxes on it, right?

Observing members: 0 Composing members: 0

13 Answers

lilikoi's avatar

I thought you either pay taxes on it before putting it in or pay taxes on it when you take it out, but that either way you get taxed. The only difference is at what rate – if you make less when you take it out and went the tax-deferred route, you pay less tax. A non-profit would be a better tax shelter, I’d think, particularly a church.

Also, you have to pay attention to the CD interest rates. They suck right now at something like 1 to 2 percent – I make more interest w/ my credit union FDIC insured savings account, and I have unlimited access to my funds 24/7 without penalty.

Skaggfacemutt's avatar

Okay so say I withdraw $5,000.00 in November and pay the taxes on it. Then in January, I file a tax return, put the 5,000 as my only taxable income, and then take out my single-person exemption of $5,000.00. Would I not get the taxes I paid on it back as a tax return?

lilikoi's avatar

I wish someone else would reply because I’m no expert on taxes. What I think is this:

If you have the kind of 401k where you pay tax on it up-front, then it is already taxed and you don’t have to pay any more tax on it when you withdraw the money. If you have the kind of 401k where you don’t pay tax up front, instead paying it when you withdraw, and you withdraw less than the standard deduction and that represents your total income for the year then I don’t think you would have to pay tax on it. Also I don’t think compounded interest or dividends you receive from 401k are taxable.

This Wikipedia article seems to have good info.

laureth's avatar

I wasn’t aware that pensions were tax free.

filmfann's avatar

Social Security AND pensions are taxable.

Skaggfacemutt's avatar

My retirement and pension company (Utah Retirement Systems) said that if you paid Social Security taxes and income taxes while you were earning your pension, then you don’t pay taxes on either. I don’t know of anyone who pays taxes on their Social Security, do you?

laureth's avatar

The IRS appears to think that Social Security is taxable in some cases.

They also have tax advice about pensions.

janbb's avatar

I think if you make over a certain amount of money while drawing SSI, you do have to pay some tax on the benefit. @laureth ‘s link probably shows this.

filmfann's avatar

We have to pay taxes on my wife’s Social Security.

njnyjobs's avatar

@janbb SSI is not pension, it is a sort of welfare income administred by SSA.

@Skaggfacemutt The answer to your question is YES…, granting that your 401K ‘withdrawal together with your other taxable income are equal to or less than the prevailing tax-year’s personal exemption + standard deduction for your filing status.

janbb's avatar

@njnyjobs My mistake; I meant social security.

thriftymaid's avatar

Any before-tax contributions will eventually be taxed. There are ways to defer. Talk to the company that services your plan.

DrC's avatar

The way that I understand it works is such: If you wait until you retire, you are forced to take a monthly amount based on some actuarial formula on how long you are expected to live divided into how much money you have. Your “required beginning date” is April 1 after you turn 70½. If you don’t take your distributions, the IRS can tax you 50% on the money you were supposed to take. Your monthly checks are then considered income and you are taxed as you would be on any other income, except that your tax bracket might be lower then. The trick is after 59½ you can take out any amount you want without paying a penalty. But once you hit retirement age, I think you have to take monthly payments. If you withdraw money prior to 59½, then you have to pay a 10% penalty, plus taxes on whatever amount you withdraw.

- reference: The Retirement Savings Time Bomb by Ed Slott

Answer this question

Login

or

Join

to answer.

This question is in the General Section. Responses must be helpful and on-topic.

Your answer will be saved while you login or join.

Have a question? Ask Fluther!

What do you know more about?
or
Knowledge Networking @ Fluther