401k Withdrawal Early, what is the tax penalty?

[Menaiya]

I recently made the (questionable?) decision to withdraw $25,721 from my 401k to pay off a 401k loan and several debts that were going to make it impossible to pay my student loan payments even after the repayment plan was discussed with my provider.  I understand after reviewing the irs.gov guidance on this that there will be a 10% penalty.

At the time of withdrawal, 20% was withheld for tax purposes.  When I file my 2021 taxes, I am expecting a 1099-R.  My income reported last year for 2019 was $71k. my income for this year will go up slightly due to a promotion and raise due to the education.  The letter I got from my 401k manager stated that the amount I withdrew is being considered "INCOME"  does this move me into a new tax bracket?  How much more will be the tax penalty.  Will I lose another 10% on top of the 20% already taken out?

Thank you very much for your time.  

[Critter-3 · Accepted solution]

In the most simple terms ... the withholding on the distribution may or may not be enough to cover the federal taxes owed when added to your other income  + the 10% penalty.

So at your income level you are in the 22% tax bracket + the 10% penalty means you will owe 33%  so you are 12% short in the withholding that needs to be made up somewhere else (like from a paycheck) or you will pay on your tax return and if you owe more than $1000 then the IRS will also add an underpayment penalty + interest. 

[Opus 17]

The withdrawal is income, and it is added to your regular income in the usual way, and subject to the usual tax.  The withholding is taken out by the government to make sure you aren't underwater too much when you file your taxes, it is not the tax you owe.

Assuming you are single, the withdrawal will be taxed partly at 22% and partly at 24%, plus the 10% penalty for early withdrawal, plus your state income tax (3-10% depending on your state). 

Remember that moving into a new tax bracket does not subject all your income to the higher rate, just the amount that is over that next threshold.  So for single individuals, and after taking off the $12,000 standard deduction; your first $10,000 of income is taxed at 10%, the next $30,000 is taxed at 12%, the next $45,000 is taxed at 22%, and 24% after that.  So let's say $75K income minus 12K standard deduction is $63K, that will be taxed partly at 10, 12 and 22.  If you add $25K of income, that's $100K, minus $12K for the standard deduction leaves $88K, so the withdrawal will be taxed mostly at 22% and a little bit at 24%. 

https://taxfoundation.org/2020-tax-brackets/#brackets