401k withdrawal

[Laf923]

When completing my tax forms i noticed that the amt of my non penalty 401k wd income carried over to the state form and plugged in a 20k subtraction under pension and annuities(pension and annuities income exclusions for local , state  federal pensions) I don't believe I am eligible for this subtraction as this is not a pension (it is a 401k savings acct). I tried 2 different tax programs with the same affect. While it looks great as I would get alot more in a return,  I dont wish to be penalized for the 1k difference if it is wrong . This.is for Nys

[DaveF1006]

To clarify, what state?

[Laf923]

New york

[MarilynG1]

On what form is your 401K Savings Plan withdrawal reported to you?  If it's a Form 1099-R, what Code is in Box 7 on your form?  If this applies, is there different amount in Box 1 and Box 2a?  The amount in Box 2a would be the taxable amount.  Is there an amount in Box 5, which would indicate after-tax contributions to the account?

If you can share more info, we'll try to help.

Here's detailed info on 1099-R for Pensions, Annuities, Retirement.

@Laf923  

[Laf923]

Hello,

Box 2a has the amt, box 2b is blank and box not checked.

Box 7 has code 1.

This is my sister's and she is aware she has to pay the penalty. From what I understand, in this situation as.long as the code 1 in bix 7 is correct,  no need for a 5329.Ira imstruction state something about this amount needing to be placed on line 8 on schedule 2 I believe.

Since it is being done via efile and not on paper I am assuming it will be placed in the proper area?

My situation is similiar except that my code is/was a 2 in box 7. This was from 2022 and no form 5329 was completed . I did not owe a penalty as this withdrawal was under the rule of 55 and I don't believe there was even an option for the 5329 like above.

I'm not seeing very definitive info on this example .

I am almost positive the first scenario the 5329 is not required and thay the penalty will be accessed and documented in the proper areas of the form however I do not know if the latter one needed to have a 5329 to reflect the exception type.

Thanks for taking the time to respond

[MarilynG1]

Here's more info on  Box 7 Codes on Form 1099-R.

A Code 1 in Box 7 will require Form 5329, which calculates the 10% penalty for early withdrawal, with no exception.  TurboTax will fill out the form for you, after asking if you qualify for any exceptions.  Here's more info on Penalty Exception for Non-IRA's.

New York automatically excludes 20K from a retirement distribution (anything on a 1099-R), if you're over 59-1/2 and received 'periodic payments' from this account. If this was a one-time distribution, go back to your Federal entry and step through the interview until you get the question about 'periodic payments'. 

Here's more info the New York Pension Exclusion.

@Laf923  

[Laf923]

I had 2 different calls from turbo tax representatives who advised that a 5329 for is not required as long as the the exception code is correct in box 7. In the case of the form with code 1- the penalty is correct and should be assessed which is was when it was filed. There are no exceptions to be had as it was a 401k the issuer closed out and mailed a check and the recipient was under 59 1/2 .

As for the 20k state exemption, I was also advised that this deduction was correct  as It was taken after 59 1/2. Now of course I am very concerned I was provided the wrong information and my taxes were filed incorrectly.

I took performed two withdrawals for the year, ine in december 2023(however company cutoff for withdrawals meant this would be counted in 2024) and another in September 2024.

[AmyC]

A code 7 in box 7 means no penalty and qualify for the NY exemption. You have code 1. Which means the 5329 on the federal and if any of the exceptions can be met, you can claim it. Super high medical bills for instance can be used even if that wasn't the original purpose.

As for NY, we don't know your age. The code 1 tells me you should be under 59 1/2 and not qualify. If you are over 59 1/2, you qualify. 

Reference: New York Pension Exclusion.

If you have already filed your tax returns, wait until they are accepted and the dust settles, then you can amend.

Follow these steps:

First - Save a copy of your original file by downloading or printing a copy for your records.

Second - You will need to file an amended return with federal and  amend your state as well. See How do I amend my federal tax return for this year? and I need to amend my state return.

Third - Correct the income.

Fourth - Be sure to enter the amount of refund already received as you go through the program. See it on line 18 of the 1040x.

Fifth - E-file federal and state, if possible. See Can I e-file my amended state return?

If you must mail your state, be sure to sign and date. Mail with tracking and no signature required.

Sixth - make any payments due online. For the federal, Payments for your state check here.

[Laf923]

Hi Amy,

I didn't see my response to your message so I'm trying again.

I want to clear up any confusion I may have caused .

Beginning with the question about the nys 20k exemption .

I was older than 59 1/2 at the time I took the first of 2 withdrawals for the tax year 2024(the transaction took place in December 2023 however the company's cutoff period pushed payout to January of 2024) and i was over 60 at the time of the second withdrawal(different amount) in September of 2024.

The 1099 r i received showed a code of 7 in box 7 which i believe indicates a regular distribution. 

I was advised fron turbo tax rep that the 20k exemption i was receiving on my nys filing it201 was in fact correct .

The problem I am having now is that someone posted that in order to be eligible, it would have to be considered a periodic distribution. 

While the acct remains open(i did not do a lump sum payout to close)  I am concerned now that it is not eligible as these were not specifically scheduled.

I did initiate a transaction on the acct in 2022 which is within 2 calender years , however the withdrawal in 2022 was done under the rule of 55(exception code 2 in box 7).

Your response said that if code 7 was in box 7 the exemption applies however it is the statement about periodic payments and the definition of that  which is throwing me off now. 

The second issue was regarding the need for a 5329 for my sister who was not age 55 at the time the company closed her 401k amd sent her a check. Her 1099 r showed a code 1 in box 7 which indicates she must pay the penalty. 

A 5329 was not completed because the code is correct and there are no exceptions to be filed to change the penalty.  I was advised by tax expert that in this scenario since the penalty code is correct and she will be paying, there was no need for the 5329. I confirmed that on irs website as well. Her taxes were filed and the summary showed the penalty assessed and her refund was reduced by the penalty amount .

Thank you for your time and help

[AmyC]

Thank you! 

1. Code 7 is a regular distribution, no 5329 on federal.  The NY exclusion generally requires periodic payment. So you may not qualify. The rules are different on inherited items. For personal pension plans, NY Pub 36 page 13 states:

 If you became age 59½ during the tax year, the exclusion is allowed only for the amount of pension and annuity income received on or after you became 59½, but not more than $20,000. Qualified pension and annuity income includes:

• periodic payments for services you performed as an employee before you retired;

• periodic and lump-sum payments from an IRA attributable to compensation for personal services, but not payments derived from contributions made after you retired that are not attributable to compensation for personal services;

• periodic distributions from an annuity contract (IRC section 403(b)) purchased by an employer for an employee, and the employer is a corporation, community chest fund, foundation or public school;

• periodic payments from an HR-10 (Keogh) plan, but not payments derived from contributions made after you retired;

• lump-sum payments from an HR-10 (Keogh) plan, but only if federal Form 4972, Tax on Lump Sum Distributions, is not used. Do not include that part of your payment that was derived from contributions made after you retired;

• periodic distributions from deferred compensation plans sponsored by state and local governments and tax-exempt organizations (under IRC section 457); and

• periodic distributions of benefits from a cafeteria plan (IRC section 125) or a qualified cash or deferred profit-sharing or stock bonus plan (IRC section 401(k)), but not distributions derived from contributions made after you retired.

2. Yes, the penalty shows on Sch 2 line 8 and if there is no other reason for the 5329, it is not necessary to add the form. The program goes through the questions for the exceptions to look for any possible reason to reduce the penalty. Without any exception, no form 5329 is correct. 

[Laf923]

• Thanks again. I am clear on the 5329 form so no worries there. However I am still stressing the 20k exemption. Like I said the previous person who contacted me for expert help told me it was correct however everything you are stating doesn't seem it is. In fact you said I may not qualify and I don't know
• how to turn that may into a definite either way

[AmyC]

I posted the NY rules.  As you can see the rules vary but a lump sum from a Keogh qualifies along with inherited accounts that would have qualified. If you had a 403b, then it would need to be periodic.

I am not sure if you income is even taxable in NY. Your pension income is not taxable in New York State when it is paid by:

• New York State or local government
• the federal government, including Social Security benefits
• certain public authorities

What kind of retirement (401k, 403b, etc) plan from what type of employer (government or private) do you have? Let's solve the riddle!

[Laf923]

It is a 401k with my former employer(a bank). I know in the past I paid taxes to the state for funds received from my 4401k. The exemption that appeared this time wasn't in play back in 2022 or may not have been based off of the fact that I withdrew funds under the rule of 55. Having not ever seen this nys subtraction_exemption is what made me question and was told multiple times it applied. I dont even know how to amend this at this point if I have to because everything carried over from the federal form. All I did was indicate the 401k funds and it automatically transferred to the state. I couldn't find any place where I needed to check or unchecked a box to remove it. But obviously I had to have checked something off that applied this exemption.

[AmyC]

The code 7 normal distribution is usually people taking regular distributions. Periodic distributions doesn't necessarily mean every month. The question at this point, are they periodic distributions that qualify or not?

From Common questions and answers about pension subtraction

What is a periodic pension payment?

Periodic payments include substantially equal payments made at least once a year over the life of the employee and/or beneficiaries or for 10 years or more.

The program does ask if it was periodic payment or lump sum and what did you do with it. All of those questions are in the federal section. There is one question that is automatically checked none of the above and it would be easy to hit continue and go right past it. 

So, if it is a periodic payment based on your 401k from a private employer, you qualify for the benefit. If not, you can amend.

[Laf923]

Amy,

Someone from turbo tax live expert called me to followup on this and according to ger(yolanda) she stated that I am qualified  as i fall under the first  line 

*periodic payments for services you

performed as an employee before you

retired;

She is saying that this pertains to my work  as  a paid employee and isn't referencing periodic payments of my 401k distributions.

I would have never interpreted that line the way she read and explained it however she was very confident this applies to my situation and what makes me qualified for the exemption along with meeting the age requirement.?