401 K withdrawal tax and Covid...

[MBoseman15]

I withdrew $7,500 due to being furloughed.  With the new Cares Act will I only pay taxes come tax season for Fed at 10% and State of MA at 5%? Also, does anyone know if I have to report this pay to unemployment? Or will they already know about it? 

[Critter-3]

First the tax rate you will pay is based on your taxable income so it may not be just 10%  however you do not need to pay the 10% penalty ... so the amount you had withheld may or maynot cover the tax bill. 

Next ... reporting the retirement distribution to unemployment ... since it is NOT earned income it is not normally reported but check with your state for certain. 

[Opus 17]

Withdrawals from traditional pretax 401(k) plans are always subject to regular income tax at your regular income tax rate. This depends on your total income for the year, but will probably be 12%, 15%, or 22%. Massachusetts state income tax might be 5%. If the withdrawal is Covid related, you are exempt from the additional 10% penalty for withdrawing the money before retirement.

Whatever tax was withheld from the withdrawal, if any, is only an estimate. You must enter the 401(k) withdrawal on your tax return along with all of your other income, using the 1099 – R form that you will receive at the end of the year. You will get credit for any withholding and your tax return will calculate your overall tax and whether you owe anything additionally or are due a refund.

[dmertz]

Since this distribution apparently qualifies as a Coronavirus-Related Distribution (CRD) due to you being furloughed, you have the option to spread the taxable amount of the distribution equally over 3 years.    The amount included each year will be taxed as ordinary income at your marginal tax rate for that year which can only be determined by taking into account your entire tax situation.  You also have the option to repay some or all of the distribution within 3 years of the date of the distribution to avoid taxation entirely on the amount repaid.  Since this is a CRD, there is no early-distribution penalty.

CRDs will be reported on the yet-to-be-released 2020 Form 8915-E.