401(k) Distribution

According the Internal Revenue Service (IRS) document 401(k) Resource Guide - Plan Participants - General Distribution Rules, distribution of elective deferrals cannot be made until:

• You die, become disabled, or otherwise have a severance from employment.
• The plan terminates and no successor defined contribution plan is established or maintained by the employer.
• You reach age 59½ or incur a financial hardship.

Depending on the terms of the plan, distributions may be:

• Nonperiodic, such as lump-sum distributions or
• Periodic, such as annuity or installment payments.

The key phrase you need to note is, "depending on the terms of the plan..." Congress created guidelines for 401(k) plans, but gave employers a great amount of leeway to create their own, more stringent rules. Therefore, although the distribution plan you suggest is allowed by Congress, your employer may have created different rules for your plan. For example, assuming you are still employed, your employer may have a rule allowing distributions only after severance of employment. However, that is a hypothetical fact I invented for the sake of illustration. Contact your 401(k) plan administrator and review the rules for your plan. If you do not know how to reach your 401(k) administrator, call your human resources or payroll department who will be able to direct you accurately.

Regarding your question, "Would I be responsible to pay any additional tax penalty...?" the answer for you is "no." You mentioned you are 61 years-old. Because you are older than 59½, you are not subject to the 10% penalty tax. If you were younger than 59½ you would need to pay the penalty tax. Of course, this assumes your plan allows you to take a distribution in your present circumstances.

Regarding the second half of your question, "can (the tax) just be added to my annual income and taxed in my appropriate tax bracket?" The answer to this question is "yes." You will receive a Form 1099-R from the plan administrator by January 31 of the year following the year of distribution. Form 1099-R is an IRS form reporting the gross distribution paid during the given tax year, the amount of the distribution that is taxable, the federal income tax that has been withheld, the contributions made to the investment or premiums paid, and a code that represents the type of distributions made to the holder of the plan.

See IRS Publication 575: Pension and Annuity Income for instructions on how to report your 401(k) distribution.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/