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

Unless you roll over all or part of the distributions you receive from your 401(k) plan to a traditional individual retirement account or other qualified pretax retirement plan, the payments are taxable. The good news is you do not pay federal income tax on contributions you make to a regular 401(k) plan until you begin withdrawing from the plan. When the time comes, the plan administrator can make the distributions in lump sums or in the form of annuity or installment payments.

Contributions to the Plan

While you are working, your employer does not include the contributions you make to your 401(k) plan in your taxable income for the year. That’s why when you receive your W-2 form at the end of the year, you will notice that the amount of your wages subject to federal income tax is lower. Because of the contributions you make to your 401(k) plan throughout the year, you have less taxable income. In turn, this reduces the amount of federal income taxes withheld from your paycheck. The downside is you are only deferring paying taxes on the income. The time will come when the distributions you receive must be included in your taxable income.

Distributions

A 401(k) plan has a required beginning date when you must begin receiving minimum distributions from the account. Under Internal Revenue Service guidelines, the required beginning date is April 1 of the first calendar year after you reach age 70½ or after the year in which you retire, whichever occurs later. Some 401(k) plans require you to begin receiving distributions at age 70½ even if you haven’t yet retired. Even though your distributions are taxed, you can choose optional methods for figuring the tax on lump sum distributions. If the distributions from your 401(k) are eligible for rollover to another qualified retirement plan, you must transfer the distribution within 60 days of receiving it. Although the money you roll over into another retirement account is not taxable, you must report the income on Form 1099-R.

Paying Taxes

You must pay taxes on any distributions you receive from your 401(k) plan that you do not roll over to another qualified retirement plan. It doesn't matter whether the withdrawals from your 401(k) plan are periodic or a lump sum. Distributions from the account are taxed as ordinary income in the year in which you receive them. No taxes are withheld from your 401(k) plan if you transfer your distributions directly to an individual retirement account or other qualified plan. If you don't roll over the money to another retirement plan, any taxable portion of a distribution you receive will have 20 percent withheld for taxes. The same applies even if you plan to roll it over to another plan later on. If you receive an early distribution from the plan before you reach age 59½, the taxable portion of the distribution that you do not roll over is subject to an additional 10 percent early withdrawal penalty tax.

Retirement Savings Contribution Credit

You can save money on an employer-sponsored retirement plan by qualifying for the Retirement Savings Contribution Credit. Also known as the Savers Credit, it is available to eligible taxpayers who make contributions to a 401(k) plan, IRA or other qualifying retirement savings plan. You can take the credit as long as your income does not exceed the maximum allowable for your filing status. For the 2011 tax year, married taxpayers filing jointly could have combined incomes up to $55,500 and still qualify to claim a credit of up to $2,000. You must deduct the amount of any distributions you received from the contributions you made when figuring the amount of the credit you can take. Use Form 8880 to claim the credit.