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twig0069
New Member

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

 
6 Replies
DoninGA
Level 15

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

Elective deferrals to a 401k are not taxed at the time of the deferral so any contributions that you made to the 401k are tax free.

 

When you make a distribution from a 401k the plan administrator is required to withhold 20% of the distribution for federal taxes.  The distribution is entered on your tax return as ordinary income and taxed at your current tax rate.  The taxes withheld from the distribution are entered on your tax return as a tax payment.

You will receive a Form 1099-R for the distribution in January of the year following the distribution.  You are required to enter the information on the 1099-R on your federal tax return.

VolvoGirl
Level 15

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

They take out a percentage for withholding when you take it out, like you had from your paychecks.  You still have to add the income to your tax return next year and it may push you into a higher tax bracket.  Then all your withholding is subtracted from the tax to give you a refund or more tax due.  So be very careful how much you take out.  And if you are under 59 1/2 there is a 10% Early Withdrawal Penalty.  

twig0069
New Member

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

Ok thanks! I’ve been out for medical issues and still have them where I can’t work so I wasn’t sure how that worked. Thanks!!

NCperson
Level 15

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

@twig0069 don't confuse "tax" with "withholdings".

 

"Taxes" are only calculated on your tax return, not on your paycheck or your 401k distributions.

 

"Withholdings" from your 401k distribution or from your paycheck are simply estimates and act as advance payments on what may be due on your tax return.  the withholdings prevent you from being 'crushed' by taxes on April 15 and if they were overestimated, result in a refund.  (at least that is the way I look at it)

SweetieJean
Level 15

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

You might consider rolling it (via a direct transfer) into an IRA, from which you then withdraw funds as you need them.  Also see:

IRAs vs. 401(k)s: Exceptions to 10% Penalty for Withdrawals Under Age 59½ Differ | Kiplinger

Opus 17
Level 15

I lost my job and want to cash out my 401k but was wondering if I get taxed on it again when you do your taxes or if you are just taxed when you cash it in.

Some points to consider. 

1. You don't have to withdraw all at once, you can withdraw as needed.

2. You will pay regular income tax plus a 10% penalty.  Any withholding is only an estimate, and you may owe additional tax when you file your tax return.

3. You have the option of rolling the funds over into a private IRA and then taking withdrawals from the IRA.  There are some legal differences between leaving the money in the 401k and moving it to an IRA, but without knowing your exact situation, it's hard to discuss further.

4. If you are "permanently and totally disabled" for IRS purposes, you still have to pay income tax but you don't have to pay the penalty.  For the IRS, disabled means unable to perform substantial gainful work (work for money) due to a condition that is permanent or will last at least one year.  Note that some people who meet a medical definition of disabled (blind, for example) are usually not disabled for tax purposes because they can still work for money, with accommodations.  If you indicate on your tax return that you are disabled, you don't send proof, but keep proof (such as a doctor's letter) with your tax papers for at least 3 years in case of audit.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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