Author Topic: 401K Dividends Question  (Read 3239 times)

FastStache

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401K Dividends Question
« on: July 07, 2013, 07:45:27 AM »
If I choose not to reinvest my Dividends back into my 401k, what penalties if any will I pay? I'm assuming I will at least pay capital gains on it or it be taxed like other income?

I'm trying to do some other investments and I'm not giving up the company match is why I am considering this.

fiveoclockshadow

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Re: 401K Dividends Question
« Reply #1 on: July 07, 2013, 10:20:36 AM »
I'm not entirely familiar with this, but I thought not re-investing dividends just made them end up in a cash position within the 401k (so a money market fund usually).  I didn't think they came out of the 401k.  And whether that is even an option probably depends on the 401k plan you are in.

As to getting money out of a traditional 401k you really can't take a distribution directly from the 401k without getting hit with a 10% penalty (except for some very specific circumstances).  Also, distributions are always taxed as income, not capital gains, even if the earnings are actually capital gains.

If you want to extract 401k funds early without penalty you typically must roll over to an IRA first.  With a traditional IRA you can do SEPP (also known as 72t).  With Roth IRA you can withdraw five years after the roll over - you pay the tax when you roll over from traditional 401k into Roth IRA and can then later withdraw from the Roth IRA tax and penalty free.  This scheme is called the Roth Pipeline.  Both are discussed here fairly frequently and you'll want to understand them in detail before implementing either.

FastStache

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Re: 401K Dividends Question
« Reply #2 on: July 08, 2013, 02:24:28 PM »
I think I am ok on any fees since it comes from an ESOP.

https://www.nceo.org/articles/dividends-employee-ownership


Rust

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Re: 401K Dividends Question
« Reply #3 on: July 08, 2013, 03:02:59 PM »
You should contact your plan administrator for this question.

From my experience though, dividends on investments within your 401(k) are not disbursed from your 401(k) thus they are either reinvested (typical) or they pool in a cash fund where you can invest in one of the plans investment options.

Since they never left their plan they don't trigger a taxable event.  I.e. leaves a qualified account (401(k)/IRA) and goes into a non-qualified account (i.e.  your Capital One 360 savings account/checking account)

-Rust
(yes that was a shameless plug hidden in there)

FastStache

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Re: 401K Dividends Question
« Reply #4 on: July 08, 2013, 05:45:30 PM »
In my case they would be added to my check.  I will contact my HR and find out.