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TAXES
JUNE 1, 2018

How Are 401(k) Account Withdrawals Taxed?

Answered by
Bill Hunter
Head of Strategy, Retirement Client Experience
Whether you owe taxes on the withdrawals you make from your 401(k) account depends on the type of contributions you've made to the account.
Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
If you're 59½ or older and you withdraw pre-tax contributions, and any associated earnings, you'll owe federal (and possibly state) income taxes on that amount. In addition, withdrawing pre-tax contributions, and any associated earnings, from your 401(k) account before you're 59½ may result in a 10% federal tax on your withdrawals (although there are certain exceptions to this).
"Remember that any funds you take out today may ultimately reduce the opportunity for your retirement nest egg to grow on a tax-deferred basis."
— Bill Hunter, director, Personal Retirement Strategy and Solutions, Bank of America, Merrill Lynch
If you have a Roth 401(k), and take a qualified withdrawal of your contributions and any associated earnings — and you're age 59½ or older and five years have passed since the first day of the year you made your first Roth contribution — you won't have to pay federal income taxes on that amount. Remember: If you withdraw any earnings associated with your Roth contributions when either of the qualified withdrawal requirements have not been satisfied, federal (and possibly state) income taxes will apply. In addition, a 10% federal tax may apply if earnings are withdrawn prior to reaching age 59½, unless an exception applies.
There's an additional possible tax consequence for 401(k) withdrawals: When you reach age 70½, the tax laws require you to make annual withdrawals known as required minimum distributions (RMDs). If you fail to withdraw your RMDs or withdraw too little, an additional 50% federal tax on the amount not withdrawn may apply.
These are all reasons to avoid taking money out of your retirement accounts before the age of 59½ if possible. There's at least one other, according to Bill Hunter, director, Personal Retirement Strategy and Solutions, Bank of America, Merrill Lynch. "Remember that any funds you take out today may ultimately reduce the opportunity for your retirement nest egg to grow on a tax-deferred basis."
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