I finally got my money out of an old 401K account that I had from a company I have not worked for in several years. I took the check to my bank to open and IRA account and I am being told that every tax year I will have to pay taxes on the interest the money earns. I am confused, I thought the point of a retirement account was to have it tax deferred until the money was ditributed to you at retirement age!!! Can anyone help me understand? I have money I need to get into an account soon!!!
2007-07-27 16:26:47 · 5 answers · asked by William C 2 in Business & Finance ➔ Taxes ➔ United States
If you open an IRA you will not pay taxes on the earnings while the money is still in the IRA. You are correct.
You have 60 days from the date on the check you received to get your money into an IRA.
Was any money withheld for taxes on your 401k check? Usually 20% is withheld for taxes. If this is the case, the amount of taxes withheld is a taxable distribution, and you will pay income tax plus a penalty on the withholding.
To recover the withholding, you will have to come up with the 20% difference that was withheld and deposit that into the IRA as well. Then when you file your tax return you will get that withholding refunded to you.
2007-07-27 22:09:56 · answer #1 · answered by ninasgramma 7 · 1⤊ 0⤋
In a traditional IRA the money is tax deferred, i.e. you don't pay taxes on the money until you start to withdraw from the account.
In a Roth IRA the interest you earn on the money you deposit is tax free, supposedly. There is no guarantee that they won't change the rules later on.
Some parts of your question are confusing to me too. I suggest you go to a different bank or investment firm. If you withdrew the money from your 401k by having them write a check to you - this could be problematic for tax reasons. It is better to have them transfer the money directly. There may be a grace period on this so get going right away.
2007-07-27 16:41:44 · answer #2 · answered by jeffrcal 7 · 0⤊ 0⤋
You may not have opened the account correctly. If you transfer the funds from one IRA to another, things are tax-free and remain that way. The bank, however, apparently thought that you had done a total withdrawal from the previous IRA, in which case the interest would indeed be taxable. This needs to be discussed with people at the bank.
2007-07-27 16:37:58 · answer #3 · answered by Anonymous · 1⤊ 0⤋
I think it means if you dont rollover into another account you will be taxed for that amount. I closed an account that I had years ago that I didnt work for anymore. I believe if you dont put the money in to a retirement account they will tax you for the amount you took out. IF you didnt have them take an estimated tax amount of the top of the money when you took it out. If you hold on to the money as in cash the check from them and put it in a checking account and fail to report it on your taxes they can tax you on it and make you have back taxes. I would consult a tax professtional.
2007-07-27 16:34:20 · answer #4 · answered by Dave 4 · 0⤊ 0⤋
NO!!!!!!
2007-07-27 16:34:22 · answer #5 · answered by just me 5 · 0⤊ 0⤋