Are federal and state tax rates the same for 401K distribution as ordinary income? | 401k Questions

Question

Asked 9/19/2006

Are federal and state tax rates the same for 401K distribution as ordinary income?

I read somewhere that we "might also pay state tax" on 401K distribution and wonder where the "might" happens vs. "might not". Also if 401K distribution is the main source of income, then will I be taxed the same as that is my income? In that case, what is the current tax rate? Thanks in advance!
Thanks for all the answers. Just to clarify, this question is for the qualified periods (after 59 1/2 years of age), so there will be no 10% penalty, etc.
One main point of my question is about "state tax." If I am paying state tax on my income now, is there a scenario where I don't have to pay state tax on 401K distribution? (e.g. what happens if I move to another state?)
MikeL, thanks for the answer. However, consider this scenario: in my life, I have been working in California (2-9% state tax), Nevada (no state tax), and others. In the end, my 401K balance is an accumulation of contribution from my working in all these states, with different state tax. In my retirement years, if I move to Nevada and withdraw my 401K, and if Nevada has no state tax on income, do I have to pay for any state tax? If yes, how? Thanks!

Answers

Answer 1/7 - Submitted 9/19/2006

Assuming you meet all the requirements to avoid a penalty tax, yes.

Answer 2/7 - Submitted 9/19/2006

Depends on the state and if 401K is the main source of income for a calender year then the amount that is received through the distribution determines the tax rate......

This also depends on age...age 65 plus is most likely the best tax age because you are in a lower tax bracket during retirement.

I'm 20. If I take out my 401K now..very small amount..it will be taxed at my tax bracket for what i make for the year.

So: Age, income amount, and geographical location all have an impact on how a 401K distribution is taxed. Because I know neither for you..its hard to really answer your question "what is the current tax rate?"

Note: Its important to say that there is usually a 10% withholding off the top and a possible 20% penalty if under retirement age.

Answer 3/7 - Submitted 9/19/2006

Funds in a 401(k) cannot be withdrawn without penalty if you are under 59 1/2. I do not know what the penalty is, as I am nowhere near that age, and have no intention of touching the account until then.

Beyond that age, any funds taken out is simply added onto your income, just like salary, etc. and fully taxed at your marginal rate in effect at the time, at both state & federal levels.

Answer 4/7 - Submitted 9/20/2006

I can't envision a scenario where your 401(k) earnings would be tax free to the state unless you worked for a state agency. I did work for a woman employed by the MD government and her 401(k) distributions were tax free in MD. However, if you don't work for your state in some capacity, I think you will pay state tax.

Think about the logic for a second. 401(k) money comes out of your wages, which are subject to tax. The tax is deferred on those wages when you put money into a 401(k); why would you not have to pay taxes later on money you deferred taxes on previously?

Answer 5/7 - Submitted 9/24/2006

You will pay state taxes on the 401-K only to the state of residence for when the withdrawal occured. If all of your career was is California (2-9% tax rates), but you retire and move to a state with no state income tax (Nevada, Florida, Texas, etc.) there would be no state tax.

California tried a few years ago to track down and tax former residents, but the federal courts made them back down.

Hope this helps.

Answer 6/7 - Submitted 9/24/2006

You might live in a state where there is no income tax, too, but most states piggy back on the fed law.

Answer 7/7 - Submitted 9/24/2006

you meet the requiments but just make sure you get before the penality

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