How to Handle 401k Contributions during Tax Season

If you have a standard 401k retirement plan, you can relax during tax season. You will not be declaring this as a deduction because it has already been counted as pre-tax dollars, meaning it was deducted from your taxable income throughout the year. This can get a little trickier if you elected a different retirement option or withdrew funds during this year.

If you withdrew funds …

And are over 59 1/2: You will pay taxes on your 401k withdrawal at your current tax rate. You are over the minimum age for withdrawing funds, so you will pay no further penalty

And are under 59 1/2: You will pay taxes on your 401k withdrawal at your current tax rate. You will also need to pay the 10% penalty for taking funds out of the account prior to reaching the minimum age for withdrawing.

If you elected the Roth option …

And have a 401k: You paid post-tax dollars into your 401k. However, you cannot declare these funds as a deduction. Instead, the tax incentive is offered on the back end. You will be able to withdraw the funds tax free at a later date in life.

And have an IRA: You paid post-tax dollars into your IRA. Just like the Roth 401k, the tax benefits are on the back end, and you will not have to pay taxes later down the line when you withdraw.

If you have a traditional IRA …

You will be able to deduct the contributions. Unlike a 401k, an IRA is paid with post-tax dollars and then listed as an itemized deduction on a tax schedule. Speak with your accountant about this deduction to avoid any misreporting.

If you have alternative retirement accounts …

In private sector companies:  Today, it is common for some people to place funds intended for retirement with independent investment groups. You may have purchased corporate bonds or stocks through an investment portfolio, and you will need to pay taxes on earnings in these accounts. Your investment house will send you an earnings statement at the end of the year to be used for tax purposes.

In public sector companies: Many government bonds are tax-free at both the state and federal level. The yields you earn each term may or may not be taxed, but the ultimate repaying of the bond is typically done without tax penalties. However, you should be careful about putting these tax-deferred or tax-free bond options into a traditional retirement account. They may lose their tax-exempt status if you do so.

If you are not sure what you have …

You will need to consult with an accountant. This is especially important the first few years you hold a retirement account and are not yet accustomed to how the filing works. For those new to the retirement savings crowd, start by asking your accountant about tax implications before you elect the type of retirement account you would like to use. Then, make sure you ask about whether you should be making regular contributions, regular tax payments or just filing everything at the end of the fiscal year.

Tags: 401k during tax season, 401k taxes, deducting an ira contribution, handling my 401k in tax season