Taking money out of your 401(k) plan before you turn 59 1/2 years old isn't the best financial decision because of the early withdrawal penalties. However, if you qualify for an exception to the penalty or simply don't have another option for funds, the withdrawal might be a viable solution to your funding needs. You'll receive a Form 1099-R that shows how much you took out. Figure the penalty or document your exception on Form 5329, and include it with your Form 1040 when you file your taxes.
Report your early 401(k) plan withdrawal on Line 16b of Form 1040. The amount of the distribution is reported in Box 2a of Form 1099-R. This amount adds to your taxable income for the year.
Report the total amount of your early 401(k) plan withdrawal on Line 1 of Form 5329.
Report the amount of the early 401(k) plan withdrawal that qualifies for the early withdrawal penalty exception on Line 2, if any. The exceptions from the early withdrawal penalty include if you retired after turning 55 and then took the distribution, suffered a permanent disability or took the distribution because of a qualified domestic relations order.
Enter the code for your exception next to Line 2. These codes are found in the instructions for IRS Form 5329. For example, if you retired after turning 55 and then took the distribution, enter code "01."
Enter the amount of your early 401(k) plan withdrawal subject to the penalty on Line 3 of Form 5329. If your exception applies to all of the distribution, you won't owe any penalties.
Enter the amount of the penalty, if any, on Line 4 of Form 5329 and Line 58 of Form 1040. The penalty equals 10 percent of the amount of the distribution not exempt. For example, if you take a $10,000 distribution but $6,000 is exempt, you only owe a $400 penalty because only $4,000 is not exempt.
Enter the amount of federal income tax withholding from your distribution found in Box 4 of Form 1099-R on Line 62 of Form 1040. This amount decreases your tax bill because it's already been taken out of your distribution.
Items you will need
- IRS Form 1099-R
- IRS Form 1040
- IRS Form 5329
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