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.

dadipsite

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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

Retread

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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

Faith20879

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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to 401ks and company match is always pre tax so there typically is no basis and everything is taxable when withdrawn.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?

dadipsite

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Joined: 9 Apr 2012

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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.

Alan S.

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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.

Calm Man

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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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You Can't Deduct That

Robert D Flach for MainStreet.com /business-news.thestreet.com writes:Before I begin a series of Tax Tips on Itemized Deductions let me tell you what you cannot deduct on Schedule A.

MEDICAL -

• Health club, gym membership, or spa fees or dues (unless you joined, at your doctor's recommendation, solely to treat a specific condition, defect, or illness diagnosed by your doctor)
• Electrolysis
• Diet food, vitamins, or nutritional supplements
• Cosmetic surgery (unless necessary for medical reasons)
• Life insurance or income protection policies.
• Medicare tax withheld or the Medicare portion of self-employment tax
• Nursing care for a healthy baby.
• Illegal operations or drugs – the IRS "just says no" to a deduction for medical marijuana
• Imported drugs not approved by the US Food and Drug Administration
• Non-prescription medicines
• Travel your doctor told you to take for rest or to improve your general health
• Funeral, burial, or cremation expenses
• 
  

TAXES – -

• Federal income tax
• Social Security and Medicare tax withheld or paid for household employees, or self-employment taxes
• Transfer taxes or tax stamps on the sale of property
• Homeowners association fees
• Estate or inheritance taxes
• Charges for water, sewer, or trash collection

INTEREST -

• Auto loan interest
• Credit card interest or finance charges
• Interest on federal or state tax deficiencies or late payments
• Home purchase interest not secured by the residence
• Installment loan interest
• Life insurance policy loan interest
• Pension loan interest
• Personal loan interest

CONTRIBUTIONS -

• Contributions directly to an individual or family, regardless of the recipient's financial or health status
• Contributions to political or lobbying organizations or election campaigns
• The value of blood donated
• The value of your time to perform volunteer services
• Contributions to non-profit homeowner or condo associations, or social or sports clubs
• Contributions to foreign organizations
• Raffle tickets purchased from a church or non-profit organization (they can be deducted as gambling losses if you are reporting gambling winnings)
• The rental value of the use of a vacation property donated to charity for a "vacation auction"
• Appraisal fees to determine the value of donated (they can be deducted as a "miscellaneous deduction")

MISCELLANEOUS -

• Country and social club membership dues
• Commuting
• Expenses directly related to non-taxable income
• Investment conventions, meetings or seminars
• Legal fees for a divorce (unless related to tax planning or fees to collect taxable alimony)
• Parking tickets and other fines for illegal acts
• Travel to stockholders' meetings (except in "special circumstances" such as a proxy fight)

While not deductible on Schedule A, some of the above items may be deductible on Schedule C, E or F if they apply to a business, rental property or farm.