Hello experts,
I believe someone here would be able to help me with this question.
I participate in my employer sponsored 401K plan and I contribute to both traditional and Roth 401K. I balanced the account few times in 2012 and as part of it exchanged some mutual funds for others that had lower expense ratio and better returns. The NAV of the entire portfolio increased as a result of the exchange. My 401K plan administrator provides a breakdown of the source of income into the 401k plan and a sum total of the exchange amount but not the breakdown of the exchange. When I start withdrawing money from the traditional 401K how do I determine what portion of the gain resulted from the exchange of funds acquired from traditional 401K sources for tax purposes?
Thanks
Yagnesh
Tax on profit from exchange of funds in a 401K account
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Re: Tax on profit from exchange of funds in a 401K account
What do you mean by "the NAV of the entire portfolio increased as a result of the exchange"? That doesn't make any sense. The NAV can't go up from exchanging.
At any rate, in a traditional 401(k), all withdrawals are taxed at ordinary income rates (unless rolled over to a TIRA). All withdrawals from a Roth 401(k) are tax free. The custodian has to maintain separate accounting for the traditional and Roth contributions, even if that isn't shown to you. When you make withdrawals, a 1099 will be issued with the tax breakdown.
Brian
At any rate, in a traditional 401(k), all withdrawals are taxed at ordinary income rates (unless rolled over to a TIRA). All withdrawals from a Roth 401(k) are tax free. The custodian has to maintain separate accounting for the traditional and Roth contributions, even if that isn't shown to you. When you make withdrawals, a 1099 will be issued with the tax breakdown.
Brian
Re: Tax on profit from exchange of funds in a 401K account
So you moved money from traditional 401K to Roth401k ?
Moving money from traditional 401k to Roth 401k will be considered a early withdraw and you will be hit will 10% penalty and income will be added to W2.
I would suggest you consider advice of tax adviser.
Moving money from traditional 401k to Roth 401k will be considered a early withdraw and you will be hit will 10% penalty and income will be added to W2.
I would suggest you consider advice of tax adviser.
Re: Tax on profit from exchange of funds in a 401K account
I don't understand the NAV going up part either???
Since your question mentions the traditional 401k a couple times, I believe that is the account you are talking about. And, then you are saying you were contributing to "fund X" for however long, that fund grew/profited for you, and last year you dumped "fund X" for "fund Y"... and 20 years from now, or when you make withdrawls (without penalty) you wonder if you will be taxed on those "fund X" profits? Or, are you asking if you will be taxed yearly for making moves like that in your traditional 401k? No, to both. You can jump around from fund to fund all you want in your traditional 401k. Although, that's called market timing and we don't like that around here. Moving to lower ER funds sounds like it may have been a good move though.
As mentioned, when you go to make withdrawls someday from the traditional 401k (without penalty) you will simply be taxed at your tax rate at that time. They won't go back and see what moves you made in 2012 and tax you for those.
Since your question mentions the traditional 401k a couple times, I believe that is the account you are talking about. And, then you are saying you were contributing to "fund X" for however long, that fund grew/profited for you, and last year you dumped "fund X" for "fund Y"... and 20 years from now, or when you make withdrawls (without penalty) you wonder if you will be taxed on those "fund X" profits? Or, are you asking if you will be taxed yearly for making moves like that in your traditional 401k? No, to both. You can jump around from fund to fund all you want in your traditional 401k. Although, that's called market timing and we don't like that around here. Moving to lower ER funds sounds like it may have been a good move though.
As mentioned, when you go to make withdrawls someday from the traditional 401k (without penalty) you will simply be taxed at your tax rate at that time. They won't go back and see what moves you made in 2012 and tax you for those.