Saturday, February 22, 2014

Taxes on 401K withdrawl

Over at Bogleheads we came across the following discussion: Taxes on 401K withdrawlby dadipsite » Fri Feb 21, 2014 12:46 pm
Hi,

I rolled over my employer sponsored 401K accounts over to Vanguard, once in 2003 and again in 2012. As I look at my Vanguard account now, they don't have cost basis information associated with the Rollover IRA.

My question is - what will happen from a tax perspective when I am ready to withdraw funds from my account? Would I have to assume a 0 cost basis as Vanguard hasn't kept this information? Or is there anything else I can do?

Thanks.
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Re: Taxes on 401K withdrawlby Retread » Fri Feb 21, 2014 12:51 pm

Are you sure you have a basis in the IRA? If you do, it is not Vanguard's responsibility to keep it; It's yours by filing Form 8606 with your Federal income tax return.
Bruce
absit iniuria verbis
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Re: Taxes on 401K withdrawlby Faith20879 » Fri Feb 21, 2014 1:07 pm

dadipsite wrote:... my employer sponsored 401K accounts ...



Was this pre-tax, after-tax, or mixed? If the whole pot is pre-tax then there is no basis.

Faith
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Re: Taxes on 401K withdrawlby placeholder » Fri Feb 21, 2014 2:23 pm

To clarify most people make pre tax contributions to 401ks and company match is always pre tax so there typically is no basis and everything is taxable when withdrawn.
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Re: Taxes on 401K withdrawlby dadipsite » Fri Feb 21, 2014 2:43 pm

Its all pre-tax contributions via employer 401(k) that got rolled over to a Vanguard IRA. I am sure there is employer matching of some sort in the mix as well. Would it still be all taxable upon withdrawl. i.e. $0 cost basis?
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Re: Taxes on 401K withdrawlby Alan S. » Fri Feb 21, 2014 3:01 pm

dadipsite wrote:Its all pre-tax contributions via employer 401(k) that got rolled over to a Vanguard IRA. I am sure there is employer matching of some sort in the mix as well. Would it still be all taxable upon withdrawl. i.e. $0 cost basis?



Yes, providing this rollover accounted for your entire IRA balance. If you don't pay tax on the contributions, you would have to pay on the distribution. But you might have other IRA accounts or you might have made non deductible IRA contributions to any of these accounts, and then you would have some basis if you properly reported the basis on Form 8606. Otherwise, you have no basis and distributions are fully taxable. And even if you DID have basis, Vanguard does not know about it since they never see your 8606. Only you and the IRS know your basis, so even if you do have basis the 1099R will still show the full distribution as taxable, but there will also be a box checked "Taxable amount not determined". You then report the distribution on Form 8606 and the form or your tax software calculates the taxable portion of your distribution.
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Re: Taxes on 401K withdrawlby Calm Man » Fri Feb 21, 2014 5:41 pm

dadipsite wrote:Its all pre-tax contributions via employer 401(k) that got rolled over to a Vanguard IRA. I am sure there is employer matching of some sort in the mix as well. Would it still be all taxable upon withdrawal. i.e. $0 cost basis?



Yup, easy as pie. Almost all 401K contributions (but not all) are pretax and all matches by employers are. If they aren't, it is a very conscious decision to make these types of investments after tax and very rarely is it done (although I actually did). When it was transferred out, it was very clear that there was a pretax part to be rolled over and a post-tax part that I got in cash.
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Re: Taxes on 401K withdrawlby JW Nearly Retired » Fri Feb 21, 2014 10:08 pm

The OP raises a very good question. Some people might have a pre-tax basis in their 401k. I for one do. The 401k admin keeps track of the basis and it is adjusted every year because I'm taking RMDs. If I were to roll this 401k to a Vanguard IRA how will the IRA pre-tax basis get communicated to IRS and tracked in IRS records?

Do I just file a 8606 with my new totality of IRAs and their new basis that I figure out for myself? How is this supposed to work?
JW
Retired Summer 2013

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