HOW TO AVOID 401(k) WITHDRAWAL TAXES
March 7, 2022 - Douglas Myser
How to avoid 401(k) withdrawal taxes. With the Covid pandemic and need for more government money to help the U.S. economy along, Congress has been looking for alternative sources of income. Taxing retirement plans more than they had been before was discussed by the Congress as an alternate way of doing just that. The 401(k) has been a powerful tax advantage tool for retirement savers over the last few decades, Employer's match in many plans the amount that an employee contributes. Except in certain cases though, you cannot withdraw from the 401(k) without paying regular income tax on the withdrawals. There are some strategies for getting some access to funds without it triggering distribution taxes and penalties. How to avoid 401(k) withdrawal taxes.
Though not tax free, the 401(k) plans are "tax advantaged". You pay payroll taxes for FICA and Medicare on all money before you contribute it to a 401(k). The tax advantage only applies to income taxes and it's only a deferral, not an escape. There is no way to take a distribution from a 401(k) without owing income taxes at the rate you're paying the year you take the distribution. Even if your plan allows for a hardship, distribution before age 59 and a half, you'll usually be charged a 10% early distribution penalty. This penalty is on top of the income taxes that will due at your regular rate. You can't avoid paying income taxes by simply never taking distributions either. Once you reach age 72, you have to start taking required minimum distributions. And you'll have to pay taxes on the Required Minimum Distribution amounts in the year they are taken. If you are like one of the individuals, who during the Covid pandemic, took out a very large contribution to get by, and now are faced with a large tax debt, you will need some type of a long term Tax Resolution, or you may end up with a IRS Wage Garnishment. One solution for those with a tax debt, due to taking out a distribution might be the IRS Fresh Start Program.