Retirement income comes in a variety of shapes: Individual Retirement Accounts, Roths, 401k and 403b plans, SIMPLE and SEP IRAs all fit the bill. What most of the income has in common is it's tax free when it's withdrawn. Even so, the Internal Revenue Service still wants to know how much you take. Your account administrator will send you a 1099 form each year to tell you how much money you took out.
IRAs, 401ks and other plans that let you contribute money tax-free expect you to make up the tax when you cash out. You claim the withdrawals in the "income" section on the front of a 1040 even though it isn't taxable. Income from traditional IRAs -- along with SEP and SIMPLE IRAs -- goes on line 11. Your 401k or 403b income is covered under "pension income" on line 12.
If you have a 401k and a high adjusted gross income -- more than $92,000 for a couple filing a joint return, as of 2012 -- the government reduces and eventually eliminates tax-free contributions to an IRA. If you make taxable contributions instead, you don't pay tax when you take the money out. You still use line 11 to keep the IRS informed. Use 11a for your total withdrawals, and 11b for the taxable amount.
A Roth IRA works the opposite of most retirement plans because the tax is due when you make the deposit. You're not taxed for withdrawals, but you do have to claim them on your 1040. It goes on the same line as your other IRA withdrawals. Only the taxable amounts have to be added to your wage or investment income.
Tax-Free IRA Withdrawals
If you make tax-free and taxable contributions in an IRA, you can't pick and choose which kind you later take out of the account. If 20 percent of your total contributions were taxable, then 20 percent of every withdrawal is tax-free. When you make withdrawals, use IRS Form 8606 to figure how much of the money escapes tax. Attach that to your return when you send in your 1040.
- Categories of Retirement Savings
- Traditional IRA Retirement Plan
- The Tax Advantages of Working Over Age 60
- Am I Eligible to Contribute to an IRA Retirement Plan at Work?
- What to Do If You Have Saved Nothing for Retirement
- Differences Between a 401(k) & 403(b) Retirement Plan
- How to Set Up a Solo 401(k) Retirement Plan