401K is seen as a type of retirement saving plant which was first introduced to America in 1978. Generally, 401k is not seen as taxable income, thereof you don’t have to report your 401k on your tax return.
However, if you happen to take any distributions from your 401k, then by law you are legally required to report that on your next tax return.
This is because this distribution is then seen as part of your ordinary income. Therefore, that amount needs to be included in your total earnings if your tax return. As this can affect the tax bracket that you fall into for that tax year.
In this article, we will be explaining what a 401k is and what do and don’t need to report your 401k on your taxes.
What Is A 401K?
401K plans were originally introduced to America in 1978. It was used as a way for employees to save money by deferring the amount of tax they need to pay on a portion of their income until they retire.
The contributions that an employee makes to their 401k is deducted, pre-tax, from their paycheck. That money is then deposited into an investigation on behalf of the individual.
The individual is offered various investments that they can select from, and it is up to them how much they decide they want to contribute.
Typically, this is just a small percent of their income. Some employers will then match up to a particular percentage the contribution that the employee is putting on, however, not all employers do this.
If you are paying into a 401k, then you will notice that decisions are made from your gross pay and not your net pay. These contributions aren’t taxable, and can also reduce your overall taxable income for the year.
Thus, they can help to lower the total amount that you owe for the year.
Yet, once you leave that company, then the contributions will stop. In this situation, it is your voice whether you leave that 401k plan with that employer or transfer the plan to your new employer.
When Do You Need To Report Your 401k On Your Taxes?
For the most part, you don’t have to report your 401k on your taxes. Yet, once you start getting distributions or withdrawing money from your 401 plan, then that is when you start reporting this money in your taxes.
In the section below, we have gone into more detail into why this is the case.
Distributions From Your 401k
When you decide to withdraw any money from your 401k, this is known as taking a distribution. In your 301k plan, a date will be specified when you must start making minimum distributions.
In the IRS guidelines, they state that you must take distributions once you either reach retirement or are 72 years old. Whichever one happens later.
There are some 401k plans that say once you are 72 years old, it is mandatory to start making distributions.
These distributions are taxed, this is because you are seen as getting your money back. Therefore, the distributions are viewed as a form of income that needs to be taxed.
Roll Over Your Money
It is due to this rule, that some people like to roll over their distributions into another retirement plan, as long as they don’t require the money.
Therefore, if you are eligible to roll over your distributions, then you must transfer the distribution into another qualified retirement plan, within 90 days of recovering these funds.
This money, that is then rolled into another plan is not seen as taxable, however, you must report what you have done using form 1099-R. If you don’t roll these funds over, then they will be viewed as a regular income and subject to be taxed.
When Don’t You Need To Report Your 401k On Your Taxes?
Simply, unless you are withdrawing money from your 401k, you don’t need to report this money on your taxes. As we have mentioned above, if you are rolling over your 401k distributions, then you don’t need to report this income on your taxes.
When you leave an employer, it is your choice whether you leave your 401k plan with the same investment company or you can roll the plan over to another 401k plan at your new company.
However, whatever the reason you decide to roll over your 40k plan, this doesn’t count as a taxable income. This is because the money is just being transferred from one account to another.
Therefore, you aren’t actually getting your hands on it, so you aren’t receiving any of the money.
Also, while you are making contributions to your 401k plans, you won’t be taxed on this amount of money. The money is deducted from your pre-tax at every pay day period.
Thus, these contributions will not be included in your W2 each year. Therefore, you will have a lower taxable income, so a lower tax bill.
It is important to note that these taxes are just being deferred. At some point you will receive the money from your 401k and once you start receiving this money, this is then seen as an income which needs to be taxed.
Therefore, eventually you will pay the tax for this income as well.
Generally, you don’t need to report your 401k when you file your taxes. This rule only applies while you are making contributions to your 401k, or you have rolled the money over to another investment plan.
The only time you need to start reporting your 401k on your taxes, is when you start withdrawing the money, as it is then seen as a taxable income.
It is important to check with your 401k plan, when the mandatory age is to start making distributions from your 401k, and reporting that income.