Do You Have to Claim Income From a 401k on a Tax Return?

You must start taking taxable IRA distributions the year you turn 70 1/2, the IRS says.

A 401k is an employer-sponsored retirement plan that allows you to build up a tax-deferred retirement savings fund. So long as you leave your contributions and earnings in the 401k, you don't have to report anything from the plan on your tax return, says the 401k Resource Guide on the IRS website. However, any withdrawals from your 401k must be reported on your income tax return because you owe taxes on the money you take out.

Retirement Withdrawal

If you wait until after age 59 1/2 to start withdrawing from your 401k, you're considered retired; your distribution from the plan will be taxed as ordinary income, according to the IRS. There's no penalty for taking a retirement distribution.

Tax Withheld

The 401k plan administrator must withhold 20 percent of your retirement distributions for income taxes. You must report your 401k retirement distributions as income on your tax return. These distributions are added to your other income, and tax is levied on the money according to your tax bracket.

Hardship Distribution

Distributions taken before age 59 1/2 because of a qualified financial hardship such as major medical bills or impending foreclosure are subject to income tax but not penalties. A hardship distribution, like a retirement distribution, is subject to mandatory 20 percent withholding and must be reported as income on your tax return, to be taxed according to your bracket.

Other Early Distributions

Distributions taken from a 401k plan before age 59 1/2 that don't qualify as hardship distributions must be reported as income. These are added to your other income and taxed accordingly, according to the IRS. In addition, you must pay a 10 percent penalty on your early withdrawal. As with all other 401k distributions, 20 percent is withheld for income taxes.

401k Loans

If your 401k plan permits loans, the loan proceeds aren't considered income and there's no withholding or tax, according to the IRS. But a 401k loan must be repaid in equal installments within five years and can't exceed the lesser of 50 percent of your vested balance or $50,000, as of November 2010. You don't have to report loan proceeds on your income tax return. But if you fail to keep up payments and default on your loan, the unpaid balance is treated as taxable income that you must report.

References

• IRS.gov: 401k Resource Guide