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One of the smart ways to save and invest for your retirement is the employer-sponsored [b:be5e960f18]401(k) Retirement Plan[/b:be5e960f18]. This article explains the basics of the plan and highlights the following aspects:


What is 401(k) Plan?

This retirement plan helps you to authorize your employer to deduct a certain amount of money from your salary before taxes are calculated and put it in the retirement account. You may also utilize the cash in the account for investment purposes.


How does the plan work?

  • Maximum Contribution:
    When you participate in a 401(k) plan, you tell your employer how much you want to pay for your retirement account. You can usually put up to 15% of your salary into the account each month, but the employer has the right to limit that amount. The IRS limits your total annual contribution to $ 15,500 (for 2008).
  • Employer's Contribution:
    Your employer's contribution may match yours but at different levels. A typical match might be 25%-50% of your own contribution up to a certain level.
  • Investment Options:
    With the new rule coming into effect from the end of October 2007, employers can select from a list of pre-approved funds which they consider suitable for long-term investments. Actively managed funds, life-cycle and balanced funds will be accepted but money market and stable value funds will be excluded from the investment list.
  • Withdrawal Option:
    After reaching 59 and 1/2 years you may withdraw from your retirement account without paying the penalty. But after 70 and 1/2 years you must withdraw a required amount, that is the minimum distribution. Otherwise, you will have to pay an accumulation tax as much as 50% of your required distribution.
  • Added Contribution:
    A Catch-Up Contribution option has been added to this retirement plan. This option enables participants aged 50 and above to increase their contribution in the retirement account. It refers to a supplementary pre-tax contribution made by the participant in excess of the IRS limit or even an employer-imposed plan limit. The annual catch-up contribution limit is $5000 for 2008.

    Eligibility for catch-up contribution:-

    1. Participant has to be in pay status.
    2. They are not in the 6 months non-contribution period following the receipt of financial hardship in-service withdrawal.
    3. The participant's regular plan contributions must reach at least one of the following limits to qualify for catch-up contribution:
      • The Annual Deferral Limit ($15,500 for 2008).
      • The Plan's Deferral Limit (up to 15%).


How do you benefit from the plan?

The benefits that you share from the 401(k) plan are as follows:-
  1. The money you contribute comes out of your paycheck before taxes are calculated and this means that by contributing to a 401(k), you can actually lower the amount you pay each time in current income taxes.
  2. All employer contribution and any growth in the 401(k) account grow tax-free till you withdraw it. Once you start withdrawing the required minimum distribution, you have to pay tax on the withdrawal at your current income tax rate.
  3. If your employer's contribution matches yours, the matched amount is your extra gain.
  4. The employee can decide where to invest current savings and/or future contributions so that he can get can get maximum returns on his investment.
  5. Unlike a pension plan, all contributions can be moved from one company's plan to another company's plan or to an IRA if the participant changes his job.
  6. The plan is protected by Pension (ERISA) laws.


What are its drawbacks?

Putting down your money into a 401(k) account is indeed advantageous but there are some drawbacks as given below:-
  1. It is difficult to access your 401(k) savings before the age of 59 and 1/2 years but it is not impossible. In case of emergency you can withdraw from your account before you reach this age but 10% of your total distribution will be charged as penalty along with the taxes.
  2. 401(k) plan is not insured by the Pension Benefit Guaranty Corporation.
  3. Employer matching contributions do not become the property of the employee until a number of years have passed.


Can you take a loan from your 401(k) account?

It is easier to take a loan from this account as you don't have to undergo a credit check or a lengthy approval process. Even the rate of interest is comparatively low and you pay the interest to yourself.

However, there are demerits too. The money out of the account is not growing, there may be fees involved in the process and the loan must be paid back immediately if you change your job. Moreover any default in loan repayment is considered as an early withdrawal forcing you to pay taxes and penalties.


How can you improve your declining 401(k) balance?

Look closely at how you are investing. Then follow the simple steps given below:-
  • If you are investing heavily in your employer's company stock, reduce this amount and spread your investments.
  • Adjust your contributions and you can contribute the maximum tax-deferred amount to your 401(k) account.

Your age and your company's plan policy will help you to decide on the strategies you adopt to repair your plan account.

401(k) is an excellent way to plan for your retirement. It helps you to increase your savings and at the same time make money by investing in the plan options. Thus, you can have complete financial security at the time of your retirement with the help of 401(k) Plan.

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

OUR COMPANY WOULD LIKE TO SETUP A 401 K PLAN FOR OUR EMPLOYEES. WE ARE A SMALL COMPANY OF 11 EMPLOYEES. IF YOU CAN HELP US PLEASE CONTACT ME AT 760 324-9333

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Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi,

I shall forward your request to our Site Administrator and let you know what can be done in this regard.

Thanks,

Caron.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Can I make weekly/monthly cash contributions to my 401K after I have quit my job? Can I do this after I have rolled into the IRA?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Rhsalot,

When you quit your job, you should rollover the 401k account either to your new employer's 401k program or to the IRA and then you may keep on making contributions to that.

Like | Dislike | Share | Posted: Thu, 02/04/2016 - 23:52 | Post subject:

Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

thanks jenkin, I own my own business, i will be working there full time. Right now we are not set up for a 401K. Just wondering if i could make cash contributions to the rolled over IRA.

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Rhsalot,

Yes, you can always do that.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Thanks Jenkin, What other options are there if I do not want the IRA?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Rhsalot,

I think IRA is the best option to reduce the expenses.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

The company for which my husband used to work was shut off and all his 401k was in the company stock. It had contributions from his employer as well as his own contributions. His financial advisor suggested him to withdraw the entire amount and rollover to an IRA. He was advised to invest after that was done. But unfortunately, when we went to pay our taxes we were told that we have to pay the penalty as well as taxes on the entire amount withdrawn from the 401k. Do we really owe the penalty and taxes? Please help

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Dorothy,

Was it a direct rollover from the 401k account to the bank or did they issue a check to your husband which he later put in the bank IRA accounts?

If it was a direct rollover then you don't have to pay taxes and penalty for that. There might have been some mistake in the code in box 7 of your 1099-R form. Consult your tax accountant and ask him to thoroughly go through the 1099-R form.

If your husband was issued a check from the 401k account which he later deposited in the bank IRA, then you may have to pay penalties and taxes. You had 60 days from the date the check was issued within which the proceeds should have been rolled over to the IRA. If this was not done, then you have to pay an early withdrawal penalty and will be added to your taxable income.

Feel free to ask the community if there's any further query.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello dorothy, what is this 1099-R form and how much of withdrawal penalty is required to be paid?

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jenkin7's picture
jenkin7 | Joined: June 4, 2007 11:02 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hello Swift,

I think I can help you with the first part of your query.

An IRS 1099-R form is used by individuals to report his/her distributions from annuities, retirement plans, IRAs, insurance or pension. The form includes information like the gross distribution paid during a particular year, the amount of the distribution that is taxable, any withheld Federal income tax, contributions made to an investment or premiums paid as well as a code to identify the type of distribution made to the individual.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I'm am 59 1/2. Can I pull a large portion out and put into Mutual Funds. I'm still employeed with the company and would like to continue putting into my 401K but would also like to take this large portion and put into the Mutual funds.

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Caron's picture
Caron | Joined: July 19, 2005 08:37 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Becky,

As much as I understand, you can invest money taken out from 401k plan account into mutual funds. Since you are 59 and 1/2 years of age, you need not pay penalty for the withdrawal. The 3 major types of mutual funds you may go for are Money market funds, Bond mutual funds and Stock mutual funds .

Good luck

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

what is 72(t) ?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome george_gs,

The IRS has a rule known as 72(t) according to which a person contributing to 401k plan account can withdraw cash prior to the age of 59 and 1/2 years without having to pay the 10% penalty.

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi George,

Welcome to the forum.

72(t) distribution is a rule of IRS that eliminates 10% penalty even if you withdraw money early from your 401k, 403(b) plan prior to age 59/12.

Hope this helps you.

Feel free to ask if you have any further questions.

Best of luck,
Larry

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blue's picture
blue | Joined: October 21, 2005 09:17 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi,

Welcome to Mortgagefit discussion board.

72(t) distribution from an IRA rollover account is one of the ways through which you can save yourself from the penalties if you wish to take early retirement and also want to get benefits from your 401(k) plan account.

Say you want quit your work early. Then you need to roll your 401(k) into IRA. After that you can apply for 72(t) distribution. The rule is after the completion of the rollover and setting up the 72(t) you must continue it until the age of 591/2 or minimum of 5 years whichever comes last.

Do let me know if you have any other questions.

Thanks
Blue

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

hello larry, is it 72(t) or 73(t)? pls clarify.

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larry2's picture
larry2 | Joined: June 27, 2007 02:50 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Dan,

I am talking about 72(t) distribution plan not about 73 (t) :)

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Is The money I contribute to my 401k secure. In other words my contributions are basically in a saving account (I've opted not to invest it so I get minimum return). Are there anyway possible reasons that money wont be there when I retire?

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

As far as I know, the 401k money is usually secure.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

i am 65 if i am working in a new company can i contribute to a new 401k, and what happens after 70 can i still contribute - and at 70 how much do i have to withdraw from my old 401k

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Joyce!

Welcome to Forums!

If your new company offers you a 401k plan, then you can contribute to that plan. You must begin making distributions from your old account after you turn 72. If you are still employed at the company sponsoring the 401(k) plan, then you do not need distributions. The amount of distributions will depend upon life expectancy according to the relevant factors of the correct IRS tables.

Feel free to ask if you have further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am 59 1/2 and would like to withdraw from my 401k to become debt free...

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi jaguar,

As far as I know, the rules for withdrawing money from your 401k account states that you will have to be 59 1/2 years old to withdraw money from this account without penalty. As you have mentioned that you are 59 1/2 years old, I think you will be able to withdraw the money.

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am 59 1/2 and would like to make a large withdrawal from my 401k to payoff my high credit card debt.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

how financial wise will this be?

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi jaguar

As you are 59 and 1/2 years of age, you will face no issues in withdrawing from 401(k). Withdrawing from 401k is not a bad idea. But as you want to pay off credit card debts, you can even try for a debt consolidation or a debt settlement. In case of a debt settlement, your outstanding balance will be reduced by 40%-60%. In case of debt consolidation, the interest rates may be reduced. I know of a debt consolidation community - "debtconsolidationcare.com". You can visit their website and speak to their financial coach. Let's hope they will be able to help you.

Thanks.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

what percent is considered miniumum after 70 1/2

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi window

If you're over 70-1/2 years old, then you are required to do some mandatory withdrawals from your 401k account. As far as I know, the minimum distribution amount at 70 1/2 years of age is currently 3.65%.

Thanks.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

What is the difference between per and post tax contribution to a 401? Is it like the difference between IRA and ROTH IRA?

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Post-tax contributions are not tax-deductible as a result of which you will not get a tax break for making them. As the post-tax contributions are made with money that you have already paid taxes on, you can enjoy the benefit of tax-deferred growth.

As you withdraw post-tax 401(k) funds, you will have to pay taxes on the profit that your investment has earned. You may also withdraw your post-tax contributions at any time without incurring a penalty depending upon the plan. The post-tax 401k can be rolled into a Roth IRA when you retire and you are not required to make mandatory withdrawals at the age of 70.

As far as the pre-tax contributions are concerned, the taxes are due only when you take money out of your account. It is known for the advantage of postponing tax bills during your high income years.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

can you with draw funds from a IRA nad still contribute to a 401-k

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I think it is possible to withdarw dunds from IRA and then contribute to 401k. However, withdrawals from IRA before the age of 59 1/2 are subject to a 10% federal income tax penalty.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am 53 years old and have around 100K in my 401K plan. I have some credit card debt that I would like to eliminate. I receive a modest pension from my previous employer and am still working. I would like to know if it would be a wise move to take money out to pay off these debts?

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jerry's picture
jerry | Joined: October 17, 2005 03:24 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi Serita,

If you want to pay off your credit card debt using your 401k plan, you will actually have to withdraw a lot more than what you owe on your credit cards. The reason is the amount of penalty that you'll be paying for the withdrawal. The penalty would be 10% of the amount of money withdrawn and another 15% (atleast) as ordinary income taxes on the money. The same amount, if kept untouched would earn you a lot more in future. Thus, withdrawing from 401k will not be a very wise thing to do.

Thanks,

Jerry

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I have a 401k plan at the company I work at. Want to retire at 55. Can I pull an income from this 401k plan as long as i leave it in the companies plan and not rolling over to another plan.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Have funds in traditional IRA, am older than 59 1/2. What factors should I consider in trying to decide wether or not to a w/d additional funds (above the RMD), paying tax thereon (tax rate lower than when funds placed in the IRA), reinvesting in tax free investments which provide a flow of income? What is the value of converting current holdings to ROTH IRA?

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smith.sussane's picture
smith.sussane | Joined: September 18, 2008 09:57 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

H!

Welcome to forums!

To Garrett,

Withdrawing money from the 401k plan before the age of 59 and ½ years of age will make you liable for tax penalty. If you are comfortable paying the taxes, then you can go ahead with the withdrawal.

To Jim,

As you're older than 59 and ½ years of age, you will be able to withdraw money from your IRA account. You won't be liable for any taxes in that regard. As far as converting the account into ROTH IRA is concerned, you should contact a tax adviser in this regard. He'll let you know whether there would be any tax implications.

Feel free to ask if you've further queries.

Sussane

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

OUR COMPANY WOULD LIKE TO SETUP A 401 K PLAN FOR OUR EMPLOYEES. WE ARE A SMALL COMPANY OF 11 EMPLOYEES.

[size=9:93ab2f5abd][color=Red:93ab2f5abd][Email address deleted as per forum rules. Thanks.][/color:93ab2f5abd][/size:93ab2f5abd]

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Niicss's picture
Niicss | Joined: October 3, 2005 11:54 pm | Posts: 0 | Location: New Jersey | 00 Dollars($)

I don't think anyone here will be able to help you in setting up a 401k plan for your employees. I would suggest you to contact an attorney and take his help in setting up a 401k plan for your employees.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Who do I turn too to get a loan? What telephonew # do I need to call? How Ca I get My owqn Money. Pl. Help. For contact info. call 239-673-8625 or239-645-9267

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi John,

If you want to take out a 401k loan, then you'll have to speak to your human resources or benefits manager at work, or by logging into your 401(k) plan's website. Some plan providers allow you to request loans online.

Thanks

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

NEED TO KNOW THE TABLE ON CASHING OUT 401K AFTER 70 1/2

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi ED BELL,

I'm not very sure about your query. Nevertheless, you should check out the given page in order to find out more in this regard:
"http://www.irs.gov/retirement/sponsor/article/0,,id=144501,00.html"

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Should I be waiting for a document from my 401K if it is pre-tax? Thank you. Kat in sNJ

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adonis's picture
adonis | Joined: October 22, 2005 05:04 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Welcome Kat,

Well... this is a query which will be better answered by your tax adviser. You should contact your tax adviser and take his opinion in this matter.

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Anonymous's picture
Anonymous | Joined: June 8, 2004 01:06 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

I am 66 and withdrew from my 401k. They withhheld Federal tax but not state. Do I have to pay Hawaii tax on the withdrawal?

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jameshogg's picture
jameshogg | Joined: December 20, 2005 02:58 am | Posts: 0 | Location: New Jersey | 00 Dollars($)

Hi auntie fifi,

This is something which you need to clarify with a tax adviser. He will better help you in this regard.

Thanks

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