How are 401k taxed?

31st Oct 2009 by Joseph Pousada

The 401k plan is a qualified plan and allows you to contribute to your 401k on a tax deferred basis. When withdrawals are made it they will be considered income in the year in which they are withdrawn and subject to taxes. The assumed benefit is that once you retire you will be in a lower tax bracket and that the funds can grow tax deferred. You can make qualified withdrawals after reaching 59 ½ years of age or if you qualify for an exception (i.e. you have become disabled.) If you feel you qualify for an exception you should consult your tax advisor beforehand to ensure your personal situation meets the definitions and guidelines set forth by the IRS. If you do not meet an exception and you have not reached the age of 59 ½ years of age then the withdrawal is classified as a “premature withdrawal” and is subject to IRS penalties for the tax year in which it is made.

For employers, the amount you contribute matching and in excess of matching contributions to the plan is tax deductible up to certain limits set by the IRS and how the contribution is distributed amongst participants is subject to certain IRS guidelines. Consult your tax advisor and attorney about your specific plan and the amount you wish to contribute.

Reference:
http://www.irs.gov/taxtopics/tc424.html
http://www.irs.gov/retirement/sponsor/article/0,,id=151800,00.html

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com