Tax consequences of liquidating a 401k
In other words, the withdrawal that “costs” the most is usually the one with the greatest tax impact.
For emergencies, it is wise to have three to six months of living expenses in a liquid account, such as a money market fund or high-yield savings account.
When distributions are made the taxable portion of the distribution will be calculated as the ratio of the non-Roth contributions to the total 401(k) basis.
The remainder of the distribution is tax-free and not included in gross income for the year.
Other employer-provided defined-contribution plans include 403(b) plans for nonprofit institutions, and 457(b) plans for governmental employers.
These plans are all established under section 401(a) of the Internal Revenue Code.
Similar to the provisions of a Roth IRA, these contributions are made on an after-tax basis.Currently this would represent a near 0 term saving in taxes for a single worker, assuming the worker remained in the 25% marginal tax bracket and there were no other adjustments (e.g., deductions).The employee ultimately pays taxes on the money as he or she withdraws the funds, generally during retirement.For accumulated after-tax contributions and earnings in a designated Roth account (Roth 401(k)), "qualified distributions" can be made tax-free.To qualify, distributions must be made more than 5 years after the first designated Roth contributions and not before the year in which the account owner turns age 59½, unless an exception applies as detailed in IRS code section 72(t).