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Retirement tax questions

The answer is yes, because it's going to be included in the gross distribution.  The penalty does not apply for Connecticut (CT).  

The Form 1099R would have had a code 1 in box seven which indicates the amount withdrawn was taken out before age 59 1/2. This creates a penalty as you indicated.  The plan administrator or employer is required to withhold at least 10% to cover this penalty.  However, this will not cover the personal income tax when it is added to your other income.  The gross distribution is the amount that will be taxed at both the federal and state level.

The gross distribution is added to your other income to determine the total tax liability on all of your income.  The amount you originally contributed to the 401(k) was allowed to be set aside with out paying tax on it.  A penalty occurs when you take that money out early and spend it instead of transferring it to an IRA or another employer's 401(k) plan.

  • CT1040 Instructions - Based on the information here, your CT return begins with the federal adjusted gross income (AGI) and there is not a subtraction for this early distribution.  In other words, you didn't pay tax to CT when you put the money in the 401(k).  Therefore you do pay tax on the distribution now.  CT does not have an early withdrawal penalty like the IRS.

The $500 withholding will be added to the other withholding, from your W2s as example, on your federal return to determine if you have a refund or a balance due as an end result.  If there is any CT tax withheld then you will enter that in the 1099R entry as well.

  • To record your 1099R while you are logged into TurboTax Deluxe follow the instructions below.
    • My Account > Tools > Topic Search > Type 1099r > Go
    • Click the screenshots attached to enlarge and view for assistance.

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