How to File Taxes on a 401(k) Early Withdrawal

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You have to report all withdrawals from your 401(k) employer plan on Internal Revenue Service Form 1040. An early withdrawal may require you to also file IRS Form 5329. Normally, if you tap your 401(k) before age 59 1/2, you have to pay an additional 10 percent penalty for early withdrawals, unless you qualify for an exception. Report the penalty on Forms 5329 and 1040.

Form 1099-R

  • Your employer will send you and the IRS a copy of Form 1099-R early in the year to report prior-year distributions from your 401(k). Copy the "gross distribution" number from Form 1099-R onto the "pensions and annuities" income box on your 1040. In the adjacent box on the same line, enter the "taxable amount" reported on 1099-R. However, if the "taxable amount not determined" box of 1099-R is checked, you'll have to calculate the taxable amount for your 1040, or else allow the IRS to figure it for you. Do not subtract withholding taxes from the 1040 "pensions and annuities" line.

Calculating Taxable Amount

  • You must include taxable distributions from a 401(k) in your annual taxable income. In most cases, Form 1099-R's taxable amount is equal to the gross distribution listed on the form, meaning that the distribution is fully taxable. If the taxable amount is less than the gross distribution, you employer calculated and reported the taxable amount. If the taxable amount is blank, use the IRS simplified method to calculate the taxable amount and enter it onto the taxable income box on the Form 1040 "pension and annuities" income line. Alternatively, leave the second box empty and the IRS will compute the taxable amount for you.

Withholding Taxes

  • Unless you are transferring your 401(k) early withdrawal tax-free into a traditional IRA or another qualified employer plan, your employer will withhold 20 percent of the money to pay income tax. Add the withheld amount that appears in the "federal income tax withheld" box on Form 1099-R to your other withheld amounts and enter the total onto the "federal income tax withheld from Forms W-2 and 1099" line of Form 1040.

Reporting the Penalty

  • Form 1099-R includes a "distribution code" indicating whether you're liable for the 10 percent early withdrawal penalty. If you are, enter the taxable amount of the early distribution on Part I of Form 5329 and then enter 10 percent of that amount on the "additional tax" line of the form. Enter the same amount on the "additional tax on IRAs, other qualified retirement plans, etc." line of Form 1040 and attach Form 5329. If you believe Form 1099-R incorrectly assigns you the penalty, enter the corrected distribution code on Form 5329.

References

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