401k: In general, when you receive a distribution from a qualified plan or qualified annuity, you should consider three tax options:
- ordinary income: You can report the distribution on your return as ordinary income
- Rollover : the distribution into a Traditional IRA, 401k or another retirement plan, which means you can continue to delay paying taxes.
- Ten year averaging : If you qualify, you can use ten-year averaging, which is a method of computing the tax through the distribution were spread over a ten year period.
(caution) after tax contributions aren’t taxable. If part of your distribution includes after tax contributions you made to your plan, those amounts will not be taxable and should not be included when computing your income tax using any of the above methods.
(tip) conversion to Roth IRA. Beginning in 2008, you will be able to roll over or convert your qualified plan assets to a Roth IRA, if you meet eligibility requirements.