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Question for the Money Doctors

Question submitted on Apr 16, 2020.

Question

Does the IRS tax your 401K account?

Answer

You pay tax on any distributions from your 401(k) account.   As long as you leave the money in the account, there is no tax on the earnings of the investments.

This is known as tax deferral.   You get a tax deduction for putting money into your 401(k) and any contributions by your employer into your 401(k) is also not taxed at the time.

If you take distributions from your IRA before you are 59 1/2, you will be subject to the 10% early distribution penalty plus any state penalty that may apply.   There is an early retirement exception if you took money from your 401(k) after age 55 and you leave the company.

For 2020, under the CAREs Act, as part of the Coronavirus Relief, you can take up to $100,000 from your 401(k) penalty free.   If you put the money back in within three years, it will be tax free.   Also, as part of the CAREs Act, you can borrow up to $100,000 from your 401(k) plan.


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