On my 1099 R box 4 should have paid my tax penalty. It shows a bigger tax cut than should have occurred. What's the problem here?

[bmtroubleyou]

On box 2 I withdrew the amount of $3,035. on Box 4 I held 303.50 for the IRS to eliminate this penalty, yet it still shows around $460 dollars being taken out from my return because of all this. I'm confused. I thought the penalty was 10%?

[Texas Roger · Accepted solution]

The amount of withholding on a 1099-R is just like withholding on a W-2. It is an estimate of the amount of taxes owed on your tax return. For an early withdrawal prior to age 59 1/2, you must pay both ordinary income tax and a 10% early withdrawal penalty on the taxable amount. The amount withheld is entered on your tax return as a credit. The actual tax owe and penalty is the calculated in included in your tax liability. The penalty amount is entered on a separate line from the oridinary income tax liability. You may end up paying more or less than the amount withheld.

[jerry2000]

The amount withheld from your distribution was only an estimate, just like withholding from your paycheck. The exact amount of tax is not known until you prepare your tax return, because it depends on how much other income you have. The distribution is added to your other income  and taxed at whatever your marginal rate is, and the early withdrawal penalty is added, if appropriate. The total amount of added tax may be more or less than what was withheld. You get full credit for the tax that was withheld at the time of withdrawal. You aren't being taxed again, just once accurately.