capital gains...?

Someone I know retired after a long time job because of multiple health issues and is awaiting to hear back on SS disability. This person turns 60 in June. Meanwhile, they need some income for the family budget and have turned their 401k into a IRA and will start taking monthly disbursements in April. So, they are doing the standard hold back for fed withholding because the 401k in flow was pre-tax and now Uncle Sam wants his cut. But does this person also have to pay capital gains tax on such disbursements? If so, that makes the tax bill on such money higher than actual payroll tax or do I have it wrong...?

No, just regular income tax. No capital gains taxes on qualified plans, whether it is a SEP, IRA, 403B, 401K, etc..

Your friend does realize, there is not a mandatory withholding from the 401K if it is transferred through a direct rollover, right? It is, rarely, a good idea to cash out your 401K on your own and then reinvest it in an IRA. You need to tell your friend to seek a professional.

They went through a professional. If they kept it as a 401k, there was a fee with each monthly disbursement. With the IRA, there was an initial set-up fee and a yearly cut.

Gotcha, sounds like things should be OK, then.

It is good that they have quite a bit of capital gain tax as part of the taxable income. The rates are lower for capital gains and if your combined filing joint income is below a certain level the rates on capital gains is 0 federally. As stated above the 401 K can be rolled over also. Do they need the retirement income now due to not having other income or are they planning a long term monthly payment schedule? One can setup several different payment plans for annual to monthly. Check the cost of each, also with interest rates as low as they are and the retirement plans are performing better taking out smaller amounts more frequently currently makes sense if the fees for frequent payment are minimal.

Bryce

I think the capital gains amount until it is taxable was increased to the amount that if it qualifies he isn't needing money. Last time I checked it had to be over 250,000 . If he is drawing that in a year hes loaded already (or pees his money away)

Come on guys, read what was posted. The 401K to IRA rollover has already happened, now he wants monthly disbursments from the IRA and they will start in April. The question had to do with how the disbursments will be taxed.

The correct answer, already provided, is that it will be treated as regular income and taxed according to the person's income tax bracket in the year the money is withdrawn. No additional tax for gains made while in the 401K or IRA, just what applies to regular income at the time of withdrawal.

No, these early disbursements are to cover the income that the poor health spouse was bringing in monthly. If SS disability would get approved, then they would stop the monthly disbursements until after when regular work retirement SS eligibility was reached and then they'll re-figure when to start tapping into the IRA again. I reason I brought up the capital gains was that the Bidenites are considering doubling the rates to nearly 40%. But if capital gains don't really apply for most rolled over 401k plans, unless they are huge, then there shouldn't be a problem.

It doesn't matter how much your IRA is worth, you will still be taxed at whatever regular income tax bracket is, based on the amount withdrawn each tax year. Capital gains tax does NOT apply to IRAs.

X2

No early withdrawal penalty after 59 1/2.