Taxes on 401k Withdrawals

You will have to pay income taxes on 401k withdrawals. The rate of these taxes depends on the type of account you have, your income and when the withdrawals are made. You may also have to pay a penalty in some unique scenarios, but all penalties are avoidable as long as you wait until retirement age to make a withdrawal.

Income Tax

You can deduct 401k contributions from your taxable income at the time you contribute the money. The funds grow tax free while they are in the account. At the time you take the money out, you will owe taxes. At that point, you owe taxes as part of your general income, not capital gains, which is usually beneficial because income tax tends to be lower. If you make a withdrawal before age 59-1/2, you will owe an additional 10 percent penalty.

Non Taxable Withdrawals

Any retirement account you have under the Roth structure works in the reverse way. You pay taxes on the money before depositing it, the funds grow tax free, and you pay nothing when you take the money out. This structure tends to be more favorable financially, but you can put far less money into a Roth savings account than a traditional IRA or 401k. 

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