Pretax contributions (including your contributions as well as your company's contributions, if applicable.). Upon withdrawal, the funds will generally be taxable. The only way to further delay the paying of income taxes is to roll the taxable distribution over to another retirement plan. This could be another 401(k) plan at a subsequent employer or it could be an Individual Retirement Account (IRA).
Roth 401(k) contributions (not available in all plans). Roth 401(k) contributions are post-tax and therefore are not taxed upon withdrawal. Earnings on Roth 401(k) contributions may also be nontaxable if you satisfy the qualified distribution rule. This rule is dependent on your age, reason for withdrawal, and the year when you first made a Roth 401(k) contribution to the plan. For the earnings to be tax free, you must be at least 59 1/2 or the withdrawal is due to death or disability, and the year of your first Roth 401(k) contribution to the plan must have been more than five years ago.
Participants are subject to an early withdrawal penalty in the amount of 10% of the taxable distribution received by the participant and not rolled over to another qualified plan within 60 days. The penalty is an additional tax that is paid by the participant when the participant files his federal income taxes.
The 10% penalty is not applied under certain situations. Some of those exceptions are when the distribution is:
Received after the date the participant reaches age 59 1/2
Made to a beneficiary of a deceased participant
Made to a participant who has become disabled (must be supported by medical documentation)
Please consult your tax professional regarding these and other taxable events.
If a participant receives a cash distribution of pretax balances and then rolls it over within 60 days of the distribution, the amount rolled over is exempt from income tax. However, if the participant does not make up the amount that was withheld for income taxes, that amount is taxable income subject to the early distribution excise tax.
A $2,000 account balance is distributed as an $1,800 cash distribution (after $200 tax withholding). Within 60 days, the participant can roll over up to the entire $2,000 to an IRA and defer the income tax on the distribution (making up from other sources the $200 withheld for taxes). If, however, the participant only rolls over the cash received ($1,800), the remaining $200 is still subject to income taxes and potential penalties.
If your distribution includes Roth 401(k) balances, you may not be able to roll it over.
All taxable distributions from retirement plans are reported on Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.) and not the W-2 form. The participant will attach the 1099-R to his/her Form 1040 if federal income taxes are withheld.