Tax Tips About Withholding on Retirement Withdrawals Read the Article Open Share Drawer Share this:Click to share on Facebook (Opens in new window)Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Pinterest (Opens in new window)Click to print (Opens in new window) Written by TurboTaxBlogTeam Modified Jul 10, 2019 We’re seeing several questions from people about 401(k) or retirement plan withdrawals from which income taxes have been withheld. Folks appear to be under the impression that once they’ve had taxes withheld on distributions from their 401(k)s or retirement plans, they’ve "already paid taxes" on the withdrawals and don’t need to report the withdrawal or the income tax on their tax returns… "I’ve already paid the tax on this; why do I have to pay it again?" Here’s the straight talk on this situation: in general, when a 401(k) or 403(b) plan pays a distribution to you, the federal government requires that 20% of the distribution is withheld from the distribution for income taxes. This is just like the federal income tax withheld from your W-2… it’s kind of an "advance payment" on the income taxes that will be due on the taxable income you’re getting as a result of the withdrawal. There are certain exceptions from this withholding rule, like when you receive payments over time or when it’s a distribution due to hardship. Your withdrawal gets taxed at your regular income tax rate, not at 20%. This means that if you have a lot of other income, or if that withdrawal was a lot of money, you’re very likely in a higher tax bracket than 20%: could be 25%, 28%, 33% or higher. The distribution gets added to your other income, then your income tax is figured on the total taxable income (after deductions). Your withholding, including the 20% withheld from the withdrawal, reduces your taxes due along with the withholding from any other sources like W-2s. You’ll see that 20% included on line 64 of Form 1040 along with any other withholding. By the way, a 401(k) or 403(b) plan is required to withhold 20% if it is not a direct trustee-to-trustee transfer (rollover with code "G" on Form 1099-R). If it’s a distribution from an IRA,there is no requirement that income taxes be withheld. Also, states may have withholding requirements as well. Written by TurboTaxBlogTeam More from TurboTaxBlogTeam Browse Related Articles TurboTax News Bridging The Financial Literacy Gap: A Look at the Lack… Education TurboTax Education Credits and Deductions Calculator TurboTax News Get to know 2021’s #LeadingConEducación Scholarship … Tax Planning New Year, New Tax Implications Tax Planning 5 Common Tax Forms You Should Expect in the Mail Tax Deductions and Credits How Changes in Your Life Can Save You Money Tax Refunds Three Tips to Help Maximize Your Tax Refund Family So You’re Living Together? Standard vs Itemized Deduction Calculator One response to “About Withholding on Retirement Withdrawals” My question is when I retire in 2 years my wife and I will be living on Social Security in an estimated amount of $3,200.00 per month total. The tax rate on that income will be between 10 and 13%. Additionaly I will be taking a monthly payout from our 401K of $2000.00 per month. Will we pay with holding at a rate for a person earning $60,000.00 per year or will the IRS require a payment of 20% for each withdrawal to be withheld from the 401K even though I will not be in a 20% tax bracket? Reply Leave a Reply Cancel reply
My question is when I retire in 2 years my wife and I will be living on Social Security in an estimated amount of $3,200.00 per month total. The tax rate on that income will be between 10 and 13%. Additionaly I will be taking a monthly payout from our 401K of $2000.00 per month. Will we pay with holding at a rate for a person earning $60,000.00 per year or will the IRS require a payment of 20% for each withdrawal to be withheld from the 401K even though I will not be in a 20% tax bracket? Reply