My husband and I are living on our S.S. income. We need additional income and are thinking of taking dividends earned on stock in our 401K’s in cash instead of reinvesting. I will need to start withdrawing from my 401(k) next year. If we convert the dividends to cash will that count towards my RMD? How will this change affect our income taxes? Thank you
Terry Says: All money you take out of a 40l(k) plan is taxed as ordinary income. You can easily tell the plan provider to stop reinvesting dividends, so you will be able to build up a pool of cash. There is no tax implication to doing this as the cash stays inside your retirement plan. Then when you are required to take a withdrawal (RMD), that cash will be available for the withdrawal. The amount withdrawn will then be counted as ordinary income on your tax return.