Retired at age 66 cashed out our 401k from employer plan, 226,000.00, can we spread out the tax over time?

[bill0507]

We want to reinvest  our 401k employer plan to stocks. do we pay tax on the profit or not? Can we spread out tax over time?

[xmasbaby0]

How long ago did you do this?

[fanfare]

Once you cash out, all your options collapse, like the Shroedinger wave equation.

[xmasbaby0]

@dmertz Help!!!!!!!

[VolvoGirl]

Probably a bad move.  You should have rolled it over to a IRA if you didn't like the employer's plan options.  Or did you roll it over?

[SweetieJean]

As asked above, when exactly did you do this?

[VolvoGirl]

If you just did it recently you have 60 days to put it in an IRA.  You will have to replace any withholding taken out from you own money so 100% gets rolled over.  Or the withholding will become a taxable distribution.

[Opus 17 · Accepted solution]

 Withdrawals from 401(k) plans are taxed as ordinary income. This will put you in the 28 or maybe 33% tax bracket. There is no income averaging rule that would allow you to spread the tax out over time.  Because the money was deposited pretax, you owe tax on the entire withdrawal – original contributions and gains. 

 If it has been less than 60 days, then put the entire amount into a rollover IRA, or put it back in the 401(k). Do this instantly.    Then, take your time to understand your options. You can leave the money in the 401(k), or you can invest in an IRA, or you can withdraw it. IRAs allow many more flexible investment options, and you would only pay tax when you withdrew it from the IRA.   You could roll the money over into a traditional IRA, and not pay taxes until you withdraw it to spend it, or you can roll the money over into a Roth IRA, and pay the income tax, but then you get the benefit of tax-free growth from now on.  If you keep the money as cash, and invest it with a stockbroker, not only will you owe income tax on the entire withdrawal now, you will also income tax every year on the capital gains in your stock brokerage account. 

 But if it has been more than 60 days, you're going to get hit with a huge tax bill and there is nothing you can do about it. 

[SweetieJean]

You may also be assessed underpayment of estimated tax penalties, interest, etc. by the IRS.
Also remember your State taxes.  It's a shame you didn't seek out financial advice before doing this.  One of my family members cashed in 401(k) (against professional advice) to buy a house, and has regretted it ever since.

[SweetieJean]

That large of an increase in income can also reduce or eliminate some deductions, exemptions and credits.

[bill0507]

Thanks to all haven't cashed out yet may not now.

[VolvoGirl]

Whew!!  Good thing you asked! You dodged a bullet.

[xmasbaby0]

Wow!  That is a relief.  Take time to consider your options!

[macuser_22]

If you roll it into a Traditional IRA it should be done by the plan custodian with a direct trustee-to-trustee rollover which will avoid the mandatory 20% tax withholding if you receive the funds and deposit yourself into a IRA.  

Once in a Traditional IRA (if a self directed IRA such as Charles Schwab) you can invest in any securities that  you want and can take distributions any time that you want, only paying tax on that distribution until age 70 1/2 when you must take Mandatory Minimum Distributions (RMD's).

(The procedure would to be to open an IRA account with a IRA custodian or financial institution of your choosing and then  inform the 401(k) plan custodian that you want a direct transfer of the 401(k) funds to that IRA account. They would either make an electronic transfer of the funds or issue a check to you in the name of the IRA account and IRA custodian for you to deliver to the IRA custodian - either way it is a direct transfer and the check is not payable to you but to your IRA so no 20% withholding is required).

[bill0507]

Thanks much that's what I was looking for.