formfill1

Whilst filling in my 1040nr, I noticed there were different entry boxes for Pensions as opposed to IRAs.
This suggests that they are treated differently for tax, and so could have implications for tax-planning.

Does anyone know why they are not treated the same?

Owen778

"Pensions" in the US usually refer to a defined benefit pension, whereas IRAs and 401ks are defined contribution retirement plans. These days, most US companies have dropped their defined benefit pension plans and shifted to 401ks (or similar), saving themselves money, and shifting much of the financial risk to their employees.

formfill1

So a 401k is NOT classed as a pension.

So there would be no tax implications, down the road, in rolling over a 401k to an IRA?

tom169

401(k) to IRA is a common occurrence, usually when someone leaves an employer.

Rete

You will only pay taxes on the 401K when you start to withdraw the monies. A 401K, I believe, must be through an employer and the monies you put in, are not taxed along with your salary. And IRA is a private retirement account and you are allowed to contribute only so much a year, tax free. At one time it was $2,000 per individual. No clue what it is today. But again, there is no tax to be paid on the interest/gain on the IRA until you start withdrawing.

If you withdraw before age 57-1/2, there is an additional penalty tax of 10% on the amount withdrawn. Believe that are one or two exceptions, i.e. buying a primary resident.

tom169

There are also Roth versions of IRA and 401(k).

durham_lad

There are no tax implications when rolling a 401k to an IRA, and the new IRA will be shown as a Rollover IRA as opposed to a traditional IRA or a Roth IRA.

401k money has usually been put into the account before tax so the resultant Rollover IRA will also be before tax and tax will only be liable when withdrawals are made. If withdrawals are made before age 59.5 there would normally be a 10% penalty. At age 70.5 required minimum distributions must be made according to a schedule set be the IRS, although more than the minimum can be withdrawn.

Traditional IRAs are owned by individuals and contributions can be made every year you have earned income, up to $5,500 / year while under 50 and $6,500 if over 50. Money can be contributed using before or after tax money depending on income limits. After tax contributions will also be free of tax when withdrawn but any gains will be tax deferred and only taxed when withdrawn.

Roth IRAs are made with after tax contributions and even the gains are tax free, plus there are never any required minimum distributions.

That is a rough summary.

When I retired I had a 401k and a traditional IRA with much of it consisting of after tax contributions. Being retired my tax rate was much lower so that first full year of retirement I converted my IRA to a Roth IRA and only paid tax on the gains. The following year I rolled over my 401k to an IRA.

Rete

This should read 59-1/2 .... sorry about that.

tom169

Usually better to get money out of a 401k and into IRA for better options and lower fees.

formfill1

So if both 401k/IRAs, and pensions can have pre-tax dollars put into them, why would they be treated differently, for tax purposes, when it comes to taking a distribution from them?

robin1234

I'm not quite sure what you are asking. I use a 1040, you mentioned a 1040nr. Both have two successive lines; IRA distributions, Pensions and annuities. Both lines have an a and b; full amount & taxable amount. The taxable amount of both lines is totalled up, with other forms of income, to reach your total income. So the taxable amount of both is treated the same.

Owen778

That depends. Both my wife and I have 401ks that include institutional index funds that wouldn't be available in an IRA. They also include a few pretty crappy high-fee active funds, but then that would also be true in an IRA.

These days, most large and many medium-sized US companies have better 401k options than you'd get with an IRA, but the combination of lack of knowledge and lack of purchasing power in smaller companies makes them vulnerable to additional fees and poor fund choices.

robin1234

My experience is with 403b rather than 401k. I have 403b and IRAs with TIAA, and they have the same range of funds with the same fees, available in 403b accounts and in IRA accounts. And of course, the account holder can freely move money from one fund to another (within an account.) Why wouldn't it be the same for 401k holders?

Owen778

I'm not exactly sure what you're trying to explain.

Yes, you can move money freely between different mutual funds with the account in any retirement account, though occasionally you might be restricted by frequent trading rules.

Unless your employer retirement plan (403b or 401k) includes a self-directed brokerage option, it will usually only include a small number of funds, sometimes restricted to just funds from the custodian (TIAA in your case). Mine and my wife's each have about 30 funds. IRAs, by contrast normally allow a very wide range of investments, including most mutual funds on the market, plus other investment types. A quick look through the TIAA website suggests that their accounts are normally set up in a similar way, but I guess your 403b could be different.

MidAtlantic

They are not. For plain vanilla 401k/IRAs you pay tax upon the distributions.
For ROTH versions the tax is paid up front and there is no tax payable upon distribution.