Someone I know took a $30K IRA (possibly 403(b) or 401(k) distribution and owes about $7K in taxes. The only other income was about 1800/month in social security. Are IRA distros taxed at your highest bracket rate (which in this person’s case is probably 15%) or is it taxed progressively? Doesn’t it count as ordinary income for tax purposes?
Thanks,
Rob
It depends on whether or not it went into the IRA (or whatever type of account) pre-tax or post-tax. If the contribution was pre-tax, then the contribution and all interest are taxable. If the contribution was post-tax, then only the interest is taxable.
It is ordinary income.
The taxable portion of the distribution is combined with all of your other taxable income and the whole thing is taxed using the usual progressive tax rates.
What confuses people is that there is mandatory 20% withholding on distributions from employer plans such a 401(k) plans (but not IRAs). (Plus state withholding in some states.) They think this is the entire tax they pay on on their distribution. The tax you actually pay is calculated when you fill out your Form 1040 at the end of the year. Think of the 20% withholding as more of a kind of “security deposit.” You might owe more at the end of the year or you might get some of it back. But you don’t know until you fill out your tax forms at the end of the year.
Incorrect - post-tax contributions to a qualified plan are entirely tax free when withdrawn.
That is what Tim R. Mortiss said, the contributions are tax-free, the earnings are taxable.
Please do not confuse post-tax employee contributions to a qualified plan with Roth contributions to a designated Roth account.
Most plans do not permit non-Roth post-tax contributions and most people are not aware that such a thing exists. It’s true that the earnings on Roth contributions are tax-free, but the earnings on non-Roth post-tax contributions are taxable.
Why would anyone make a non-Roth post-tax contribution? Several reasons: For example, their plan does not have a Roth option, they want to contribute more than the deferral limit ($18,000 in 2016), they want to make a Mega Back Door Roth contribution, etc.
Don’t do what I did. (Okay, that’s generally good advice at pretty much all times…)
I inherited some cash, and put it into my IRA. I didn’t keep proof of this…and so any time I pulled any money out of that IRA, it was taxed. I can’t prove it isn’t income. Big stupid mistake.
I was assuming he was talking about a Roth option within a 401k or 403b - at which point the earnings would not be taxable upon withdrawal.
But I’m glad I was unclear - your additions are good points for people to consider.
I opened up my 2016 tax year H & R Block software and did a vanilla return filing as a single person with a normal $30,000 IRA distribution and $21,600 in Social Security as the only income. Didn’t fill out any other fields for itemized deductions (although standard deduction and exemption were applied) or anything else.
The federal tax on the IRA distribution (entered first) was $2,547. That averages out to 8.5%, but is enough to get him into the 15% bracket
$10,280 of the Social Security amount was taxable and added $1,537 in tax (15%), for a total of $4,084.
If he’s under 59 1/2, you’d have to add a 10% penalty on the $30k unless it was a hardship withdrawal. That would get you to $7k, not sure how else you’d get there, adding state tax (if any) wouldn’t do it.