Question regarding withdrawing money at retirement

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Topic Author
Eurookat
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Question regarding withdrawing money at retirement

Post by Eurookat » Thu Jul 30, 2015 6:52 am

I currently have a Roth IRA that I max out every year. I found out my emplyer offers a Roth 401k. I understand the difference between a traditional and Roth accounts but here's my question. When I go withdraw money after my retirement age, do I report that as income on a 1040?

With a traditional 401k/IRA I get that I would be taxed at my tax bracket but what if I won't be working? Would my bracket be 0% or would that depend on how much I withdraw?

The same goes for a Roth, if I decide to withdraw 40k every year, does that go on a 1040 every year?

NightFall
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Re: Question regarding withdrawing money at retirement

Post by NightFall » Thu Jul 30, 2015 8:01 am

I don't know about the tax forms, but traditional withdrawals will be counted as unearned, non-qualified income. So you won't pay Medicare or Social Security tax on the withdrawal, but you will pay federal and possibly state taxes. Your tax bracket depends on how much you make/withdraw. Add up all sources of taxable income to determine what tax bracket you fall into. The situation gets a bit more complicated with social security payments because some of those can be counted as taxable income if you have income from other sources (like a withdrawal from a traditional 401k/IRA).

Roth withdrawals are not taxed. They act more like a bank account that you can only withdraw money from, but there are no RMDs for Roth accounts.

clydewolf
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Re: Question regarding withdrawing money at retirement

Post by clydewolf » Thu Jul 30, 2015 9:44 am

Should you have earned income in retirement you can contribute to a ROTH IRA.

Your 401k contributions can be tax deferred or after tax to a ROTH 401k. Employer matching contributions are tax deferred contributions.

In retirement taking distributions from a 401k that has both tax deferred and after tax money, each distribution will be part tax free and part taxable. The ratio of the two types of money in the distribution will be the same ratio as in the 401k just before the distribution.

In January of the year following the distribution the retiree will receive a form 1099-R showing the amount distributed, and the taxable amount. The 1099-R box 7 will have a code. If the distribution is from an IRA, there will also be a check mark. IRA distributions are reported on 1040 line 15, non IRA distributions are reported on line 16. Software handles this nicely.

Here is a sample of a 1099-R: http://www.irs.gov/pub/irs-pdf/f1099r.pdf

Beth*
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Re: Question regarding withdrawing money at retirement

Post by Beth* » Thu Jul 30, 2015 10:04 am

sdotsen wrote:The same goes for a Roth, if I decide to withdraw 40k every year, does that go on a 1040 every year?
The big advantage of a Roth is that there are no taxes on withdrawals. You pay tax on all the money that goes into the Roth at the time you earn the money, but there are no taxes when you take the money out at retirement age. Both the original contribution (which you already paid taxes on) and any growth in value within the Roth are tax-free at that time.

For a non-Roth IRA or retirement account funds can generally go in pre-tax, but then you owe taxes on all the money when you withdraw: contributions and earnings.

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PaddyMac
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Re: Question regarding withdrawing money at retirement

Post by PaddyMac » Thu Jul 30, 2015 10:33 am

clydewolf wrote:In retirement taking distributions from a 401k that has both tax deferred and after tax money, each distribution will be part tax free and part taxable. The ratio of the two types of money in the distribution will be the same ratio as in the 401k just before the distribution.
We only recently started putting money in our Roth 401k. I was thinking it was like a Roth IRA except that we can't touch it until we're 59.5.
In Vanguard, the 401k and the Roth 401k are quite separate when we make the contribution, and also when we check our balances: They are two different accounts almost.

Are you saying that if we have $100K total - $90K in our 401k and $10K in our Roth 401k - and we withdraw the $10K from our Roth 401k account only, that we will be taxed on 90% of it?

Topic Author
Eurookat
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Re: Question regarding withdrawing money at retirement

Post by Eurookat » Thu Jul 30, 2015 1:20 pm

Let me clarify my question, this has more to do with reporting income for tax purposes come April.

So let's say at age 70 I withdraw 50K spread over the 12 month of a particular year. Do I have to report the "income" of $50k if I pull from my Roth IRA? Let's assume that's all I would pull out and I dont have a 401k.

Now another scenario, I have a 401k and I pull out $20k in addition to my $50k from Roth. How does that work?

NightFall
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Re: Question regarding withdrawing money at retirement

Post by NightFall » Thu Jul 30, 2015 3:03 pm

sdotsen wrote:So let's say at age 70 I withdraw 50K spread over the 12 month of a particular year. Do I have to report the "income" of $50k if I pull from my Roth IRA? Let's assume that's all I would pull out and I dont have a 401k.
I think clydewolf already answered this question. You report the distribution of $50K on line 15a of form 1040. Line 15b (taxable amount) would be $0 since it is coming from a Roth IRA... although tax preparation software should handle where and what is reported for you. You would not have any taxes due on the $50K.
sdotsen wrote:Now another scenario, I have a 401k and I pull out $20k in addition to my $50k from Roth. How does that work?
In this case you would have $20K of total "income" that is taxable. Whether or not you pay taxes depends on your deductions, filing status, etc...

NightFall
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Re: Question regarding withdrawing money at retirement

Post by NightFall » Thu Jul 30, 2015 3:08 pm

PaddyMac wrote:Are you saying that if we have $100K total - $90K in our 401k and $10K in our Roth 401k - and we withdraw the $10K from our Roth 401k account only, that we will be taxed on 90% of it?
No, that is incorrect. cyldewolf was referring to deductible and non-deductible contributions to the same traditional account. Your Roth 401k and traditional 401k are quite separate. If you withdraw $10K from your Roth, you will be taxed on 0% of it.

Alan S.
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Re: Question regarding withdrawing money at retirement

Post by Alan S. » Thu Jul 30, 2015 7:03 pm

NightFall wrote:
PaddyMac wrote:Are you saying that if we have $100K total - $90K in our 401k and $10K in our Roth 401k - and we withdraw the $10K from our Roth 401k account only, that we will be taxed on 90% of it?
No, that is incorrect. cyldewolf was referring to deductible and non-deductible contributions to the same traditional account. Your Roth 401k and traditional 401k are quite separate. If you withdraw $10K from your Roth, you will be taxed on 0% of it.
A withdrawal from a Roth 401k is 100% tax free only if the Roth 401k is qualified (5 years and age 59.5). Until it becomes qualified, distributions include a pro rated amount of earnings and therefore are partially taxable. This is different from a Roth IRA where the earnings come out last (no pro rating). Also, you would want to roll the Roth 401k over to a Roth IRA before the year you reach 70.5 because a Roth 401k has RMDs that you probably wish to avoid. A Roth IRA does not.

Reporting a Roth IRA distribution is easy once your Roth is qualified. Just enter the amount on line 15a. Form 8606 and all it's basis tracking is no longer needed, and you can forget about the composition of your Roth IRA. Before qualification, you need to keep track of your Roth composition in detail, and few people are up to the task. Of course, this is only a problem if you take a distribution.

billfromct
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Re: Question regarding withdrawing money at retirement

Post by billfromct » Thu Jul 30, 2015 7:18 pm

You should check out "TaxAct Tax Calculator" & you can run all the Federal income tax "what ifs" you can think of.

bill

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PaddyMac
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Re: Question regarding withdrawing money at retirement

Post by PaddyMac » Wed Aug 19, 2015 9:58 am

Alan S. wrote:A withdrawal from a Roth 401k is 100% tax free only if the Roth 401k is qualified (5 years and age 59.5). Until it becomes qualified, distributions include a pro rated amount of earnings and therefore are partially taxable. This is different from a Roth IRA where the earnings come out last (no pro rating). Also, you would want to roll the Roth 401k over to a Roth IRA before the year you reach 70.5 because a Roth 401k has RMDs that you probably wish to avoid. A Roth IRA does not.

Reporting a Roth IRA distribution is easy once your Roth is qualified. Just enter the amount on line 15a. Form 8606 and all it's basis tracking is no longer needed, and you can forget about the composition of your Roth IRA. Before qualification, you need to keep track of your Roth composition in detail, and few people are up to the task. Of course, this is only a problem if you take a distribution.
THANK you Alan S.!
Rolling over to a Roth IRA added to list...! I was vaguely aware of the RMD issue, but I was unaware of the 5-year rule for the 401k. Fortunately it will be 6 years old by the time we can withdraw from it, but I don't remember seeing anything about that in the Vanguard docs. Love this site, always learn something new!!

Brucie
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Re: Question regarding withdrawing money at retirement

Post by Brucie » Wed Aug 19, 2015 12:21 pm

When does Roth 401K or Roth 403B become "qualified".
My spouse age 61 just changed to a Roth 403B this year 2/2015.
She will likely continue 403B Roth contributions until retirement possibly 2/2019.

Do all her Roth 403B contributions become "qualified" on 2/2020, including contributions made in later years?

Regardless we will need to remember to roll the Roth 403B to a Roth IRA after it is fully qualified, as we won't want Roth 403B distributions.
I learned something :happy

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