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Retirement Accounts and Taxes

Retirement accounts offer tax advantages and are generally simpler to handle at tax time than other types of investment accounts. There are a few issues to keep in mind, however.

Whether you’re saving for retirement or are currently in retirement, you should be aware of certain information about retirement accounts when preparing your federal income tax returns.

The information in the tabs below is the most commonly useful for many investors; however it may not be everything you need to know, as some scenarios can be complex. Consult IRS form instructions and publications or your tax advisor as necessary.

If you turned 59½ in the tax year, you may find both tabs useful.

Deducting Traditional IRA contributions

You may be able to deduct certain Traditional IRA contributions from your taxable income. For the income limits associated with deductible contributions, see IRA Contribution Limits and Deadlines. Fidelity issues Form 5498, IRA Contribution Information, showing your contribution amounts and other information about your Fidelity IRAs. For help with this statement, see Form 5498 guide for IRA contributions.

Deduct IRA contributions made up to April 15

Note that the deadline to make deductible contributions for a given tax year is usually April 15 of the following year. Most other deductions are only allowed for transactions completed within the tax year, by December 31.

Enter the deduction amount on line 32 of your 1040 or on line 17 if you use the 1040A. If you made non-deductible contributions, you will need to file Form 8606 (see the 1040 instructions for details).

When it comes time to withdraw from your Traditional IRA, any contributions you deducted and any earnings will be fully taxable. For any withdrawals of nondeductible contributions, only the earnings will be taxable.

Pre-tax contributions to qualified plans, such as 401(k)s and pensions, are not deductible, as they are already excluded from your taxable income. Post-tax Roth IRA contributions are also not deductible.

Early withdrawals

If you make early withdrawals from retirement plans—that is, before you turn 59½—they will generally be subject to a 10% penalty, in addition to federal income tax due at your ordinary rate.

If you made withdrawals (whether early or not), you must report those distributions as taxable income on your form 1040, 1040A, or 1040NR. Fidelity reports distributions to you on Form 1099-R. For more details on Form 1099-R and reporting the withdrawals on your return, see Form 1099-R guide for retirement distributions.

You must also calculate and pay the 10% penalty. You may need to file Form 5329 to do so; however, if the penalty is all you are reporting on Form 5329, you may be able to report it directly on your 1040 (line 58) or 1040NR (line 56). See the 1040/1040NR instructions for details.

Early withdrawals are permissible without the 10% penalty in certain circumstances, including those listed below.

Exceptions to Early Withdrawal Penalties

For 401(k)s and 403(b)s For IRAs
Distributions were made due to total and permanent disability. Distributions were made due to total and permanent disability.
You left the company sponsoring the plan in or after the year you turned 55. You were unemployed and paid health insurance premiums.
You had medical expenses greater than 7.5% of your adjusted gross income (AGI). You had medical expenses greater than 7.5% of your adjusted gross income (AGI).
Withdrawals were made as part of an IRS levy of the plan. Withdrawals were made as part of an IRS levy of the plan.
The distribution was made according to a qualified domestic relations order (QDRO) plan. You paid for qualified higher education expenses for yourself or a dependent.
Withdrawals were made under the HEART Act for active military. Withdrawals fell under a Substantially Equal Periodic Payment (SEPP) plan.
  You received Inherited IRA distributions.

Withdrawals from a Roth IRA

Withdrawals from a Roth IRA are generally not taxable as long as the assets have been in the account for at least five years. The 10% early withdrawal penalty will apply, however, for those under age 59½.

401(k) rollovers

When you roll over your 401(k) or other qualified plan into an IRA, you usually don’t incur immediate taxable income, since the tax continues to be deferred until you withdraw the money in retirement. This is true as long as the money was either rolled directly into the IRA or deposited into it within 60 days of the distribution from the 401(k).

Many rollovers are done directly. Otherwise, if you receive a check, taxes will be withheld and you will have to add money to the deposit in the IRA to make up for them. The tax withheld is included in your tax paid when you file your tax return.

Rolling over your 401(k) into a Roth IRA is a very similar process to converting to a Traditional IRA. However, any pre-tax funds that you roll over will be taxed as ordinary income in the year of conversion, and as a result, could push you into a higher marginal federal income tax bracket. Only after-tax contributions can be rolled over without incurring taxes.

If you rolled over your employer-sponsored plan account directly into a Fidelity IRA, you will receive a Form 1099-R from the trustee of the plan showing the distribution, as well as a Form 5498 from Fidelity showing the IRA rollover.

Additional resources

Roth IRA Conversions and Taxes
If you converted a Traditional IRA to a Roth during the tax year, learn about the federal income tax implications.

Tax-Advantaged Fidelity Solutions
Find Fidelity products that can help you manage the potential impact of taxes on your saving and investing.

More information

  • Retirement Distributions Center lock_green

    View, track, and manage distributions from your Fidelity retirement accounts.

  • MRDs for Inherited IRAs

    If a loved one has left you an IRA, learn what minimum required distributions (MRDs) you must take.

  • irs.gov

    See IRS Publication 590 for tax information on IRAs and Publication 575 for tax information on 401(k)s.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.