We already know that the capital gains and dividends of 401k is not taxable.
Also you get a 10% early withdrawal penalty if your under some certain age like 65 or something.
We know interests, dividends outside of the 401k are taxable as ordinary income

when you take a 401k distribution it is taxed at your current tax rate based on how much you earned that year, taxable as ordinary income. So what if you are under 60 but you retired and earned 0$ that year, does that mean that your 401k distribution (lets say 100,000 was withdrawn) is only taxed at 10%? Federally: $0-7,825 is taxed at 10%.

I guess my question is: does the 401k distribution count as income for tax purposes?

thanks.

Yes, a 401(k) distribution counts as income. The 10% penalty tax applies to distribution prior to age 59 1/2.

You can find most answers about 401(k) and other employer retirement plans at www.irs.gov in IRS Publication 560.

But you have hit on an interesting point. I won't call it a "loophole", and I am not an accountant.

But you can participate in what I'll call "time-based arbitrage" if you know that you'll be moving to a substantially lower tax bracket (for example if you're going back to school, or moving to a state without income tax) by maxing out your 401k contribution, and withdrawing in a year in which your income is lower, and just sucking up the 10% penalty.


Sam